Question

Saving and investment in the national income accounts

The following table contains data for a hypothetical closed economy that uses the dollar as its currency.
Suppose GDP in this country is $900 million. Enter the amount for government purchases.
National Income Account
Value
(Millions of dollars)
Government Purchases (G
)
Taxes minus Transfer Payments (T
) 325
Consumption (C
) 375
Investment (I
) 275
Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.
National Saving (S)
=

=

$
million
Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table.
Private Saving
=

=
$
million
Public Saving
=

=
$
million
Based on your calculations, the government is running a budget .

Answer 1

The government purchases in the hypothetical closed economy are $250 million. National saving is $275 million, which is composed of private saving at $200 million and public saving at $75 million. Since public saving is positive, the government is running a budget surplus.

To solve for the unknowns, we can use the national income accounting identity for a closed economy, which is GDP = C + I + G, where GDP is the gross domestic product, C is consumption, I is investment, and G is government purchases.

Given that GDP is $900 million, C is $375 million, and I is $275 million, we can solve for G:

G = GDP - C - I
G = $900 million - $375 million - $275 million
G = $250 million

So, the amount for government purchases is $250 million.

Next, we calculate national saving (S) using the identity S = GDP - C - G:

S = $900 million - $375 million - $250 million
S = $275 million

National saving is $275 million.

Private saving is given by the difference between income (Y), taxes and transfers (T), and consumption (C): Private Saving = Y - T - C.

Private Saving = $900 million - $325 million - $375 million
Private Saving = $200 million

So, private saving is $200 million.

Public saving, also known as the government budget balance, is the difference between government receipts (taxes minus transfers) and government spending: Public Saving = T - G.

Public Saving = $325 million - $250 million
Public Saving = $75 million

Public saving is $75 million.

With a positive public saving figure, the government is running a budget surplus