Question

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is 18% of GDP. What is the net trade balance as a percentage of GDP in this scenario?

a) 1%
b) 2%
c) 0%
d) 3%

Answer 1

The net trade balance in the described scenario for Germany's economy is 3% of GDP. If the government budget surplus falls to zero, the new net trade balance would be 2% of GDP.

Step-by-step explanation:

When considering the national saving and investment identity for the economy of Germany, the current account balance, which is also the net trade balance, can be found using the formula:

Net Trade Balance (Current Account Balance) = National Saving - Investment

Given:

• Government budget surplus = 1% of GDP
• Private savings = 20% of GDP
• Physical investment = 18% of GDP

The national saving is the sum of private savings and the government budget surplus, which equals 21% of GDP (20% + 1%). The physical investment is 18% of GDP. Therefore, the net trade balance as a percentage of GDP is:

Net Trade Balance = National Saving - Investment

Net Trade Balance = 21% - 18% = 3%

Thus, the answer is (d) 3%.

If the government budget surplus falls to zero, this would reduce the national saving to just the private savings of 20% of GDP. The new net trade balance would then be:

New Net Trade Balance = Private Savings - Investment

New Net Trade Balance = 20% - 18% = 2%

Therefore, the current account balance would decrease by 1% of GDP.