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In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6 billion, and net factor payments from abroad are zero. Desired consumption and desired investment are
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18 votes
In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6 billion, and net factor payments from abroad are zero. Desired consumption and desired investment are related to the world real interest rate in the following manner:

World Real Interest Rate Desired Consumption Desired Investment
5% $12 billion $3 billion
4% $13 billion $4 billion
3% $14 billion $5 billion
2% $15 billion $6 billion
For each value of the world real interest rate, find national saving, foreign lending, and absorption. Calculate net exports as the difference between output and absorption. What is the relationship between net exports and foreign lending?

User Fabian Mebus
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1 Answer

18 votes
18 votes

Answer:

Consumption is given.

Investment is also given.

Government spending is $6 billion.

GDP is $25 billion.

National Saving = GDP - Consumption - Government spending

Foreign lending = Savings - Investment

Absorption = Consumption + Investment + Government spending

Net Exports = GDP - Absorption

The relationship/ correlation between Net Exports and Foreign Lending is one that is perfectly positive as both measures are exactly the same.

In a small open economy, output (gross domestic product) is $25 billion, government-example-1
User Tobias Ernst
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