Saving and investment in the national income accounts
The following table contains data for a hypothetical closed economy that uses the dollar as its currency.
1. Suppose GDP in this country is $880 million. Enter the amount for consumption
Explanation and Calculation A closed economy does not trade with the rest of the world, and, thus, its net exports are zero. Therefore, in this case, GDP is the sum of consumption, investment, and government purchases. To find the missing value of consumption, the national income accounting identity can be rearranged as follows:
2. Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.
Explanation and calculation National saving is the total income in the economy that is left over after paying for consumption and government purchases. In a closed economy, subtracting consumption and government purchases from GDP also yields investment spending, so national saving equals investment:
3. Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table.
Explanation: Private saving is the income that remains after households pay taxes and make consumption expenditures. Public saving is the amount of tax revenue that the government has left over after paying for its spending.
Based on your calculations, the government is running a budget_______deficit_________
Explanation: - When a government spends more than it collects in tax revenues, it runs a government budget deficit. Public saving is negative in the case of a budget deficit. - Note that national saving can be thought of as the sum of private and public saving. To verify the national saving figure you derived, add private and public saving: