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 deficit
How large is saving (S)?
How large is investment (I)?
How large is government spending (G)?
First, we can use the definition of disposable income to find the level of taxes. Disposable income is income after taxes. If we remember that gross domestic product (GDP) is the same as aggregate income, then we know the figure for income before taxes. If income before taxes is $6,000 and income after taxes is $5,100, then taxes must be $900. If we know the figure for taxes and we know the amount of the government deficit, then we can determine the level of government spending. The government took in $900 in taxes and had a budget deficit of $200, which means that it spend $200 more than it took in. By adding the taxes ($900) to the amount of deficit spending ($200) we find that the government spent $1100.
Now that we know how much the government spent, we can find savings. We know that the formula to find savings is Savings = GDP – Consumption – Government spending. In this example, Savings = $6,000 - $3,800 - $1,100 = $1,100. So our figure for savings is $1100.
With all this information, we can now find the level of investment. The relevant formula is GDP = Consumption + Investment + Government spending + Net Exports. Plugging in our numbers,
$6,000 = $3,800 + I + $1100 - $100.
$6,000 = I + $4800
I = $1200
So, our answers are:
Savings = $1100
Investment = $1200
Government spending = $1100