Assume that in our fictional country GDP is $6,000, personal disposable income is $5,100,and the government budget deficit is $200. Consumption is $3,800 and the trade deficitis $100. How large is saving (S)?How large is investment (I)?How large is government spending (G)?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Since the fictional country has a trade deficit, it's an open economy. In an open economy, the savings (S) are equal to the government savings (GS) plus the private savings (PS):

S = GS + PS

However, we don't have the value for PS, so we have to find it. Luckily, private savings (PS) can be defined if we have the figures for disposable income (DI) and Consumption (C). Disposable income is the extra earnings you get after consuming and saving, its formula is as follows:

DI = PS + C

But in this case, the value of C and DI are known, while PS is unknown; therefore, we flip the equation and make PS the dependent variable:

PS = DI - C = 5100 - 3800

Hence, private savings (PS) becomes $1300.

Government Savings (GS) is what remains after the government has spent money on various public projects. It depends on the total revenue or taxes collected (T) and government expenditure (G). In this scenario, the fictional country has a budget deficit $200, meaning that the government spent more than it earned...

(The entire section contains 4 answers and 764 words.)

Unlock This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial
Approved by eNotes Editorial Team