Question

2. Total income of residents (Yp) is equal to gross income (Y) minus taxes (T) plus net income from international transfers (R). Private sector total savings is S = Yp – C. The domestic absorption of total expenditure is private sector consumption (C) plus investment (I) plus government expenditure (G), and foreign demand equals net export (i.e. export X minus import Z). Based on these identities answer the following: b) If the current account value is minus five percent of GDP and the government budget is in deficit of 2% (of GDP), then which of the following is true: I=S or SI? Explain why so.

Answer 1

Answer....
Disposable Income YP = Y- T + R where T = Tax and R = International Transfer
Saving S = YP - C
Domestic Product Y = C + I + G; where C = Consumption, I = Investment and G = Government Expenditure
Net Exports = Exports - Imports
Current Account Deficit = 1% of GDP
Currenct Account = Net Exports + net income from abroad + net current transfer
It is in deficit of 1% of GDP
Government run a budget of deficit of 3% of GDP in 2015
Saving S = YP - C
= (Y - T + R) - C
= {(C + I + G) -T + R} -C
=C +I +G - T + R - C
= I + G -T +R
Therefore, Net Saving is equal to the sum of Investment, Government Expenditure and Net Foreign Return minus the taxes with respect to GDPj