How does one determine the level of public saving and the value of goods and services purchased by the government in the following scenario?The...
How does one determine the level of public saving and the value of goods and services purchased by the government in the following scenario?
The country of Nemedia does not trade with any other country. Its GDP is $20 billion. Its government collects $4 billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $15 billion and investment equals $2 billion. What is public saving in Nemedia, and what is the value of the goods and services purchased by the government of Nemedia?
The answer is -$2 billion and $3 billion. Why?
The level of government spending on goods and services is $3 billion because of the equation for GDP. As you can see in the link below, GDP is made up of four elements. Those elements are consumption, investment, government spending, and net exports. In this scenario, you have told us the country does not engage in trade. Therefore, there are no net exports. This means consumption, investment, and government spending have to add up to GDP. In this question, GDP was given as $20 billion, while consumption was $15 billion and investment was $2 billion. Consumption plus investment equals $17 billion, leaving $3 billion to reach the $20 billion level of GDP. Therefore, government spending is $3 billion.
The level of public saving is $-2 billion because public saving is, in essence, the level of the government’s annual surplus or deficit. What we have to do here is see how much the government takes in and how much it pays out. We can see the government takes in $4 billion in taxes. We can see the government spends $6 billion because it spends $3 billion on government transfers and $3 billion for goods and services it buys from people. If the government takes in $4 billion and spends $6 billion, it incurs a deficit of $2 billion, which means public savings are $-2 billion.