Question

An economy has GDP of 10,000; consumption of 6,000; government purchases of 1,000 and investment of 2,500.

Net Exports = _______________; and Net Capital Outflow = _____________

What is the effect of an increase in the government purchases on

Net Exports (Increase or Decrease) and on Net Capital Outflow (Increase or Decrease)

Answer 1

Solution :

Y = C +I+G +NX

Y = 6000 +2500 + 1000 + NX

10000 - 6000 - 2500 - 1000 = NX

NX= 500

Net Capital Outflow = S - I

Savings = Y -C-G-NX

10000 - 6000-1000-500 = 2500

Savings = Investment ...

1. When there is increase in the government purchases , the income of the people increases and people import goods from outside the country leading to decrease in exports hence net exports decreases.If net exports decreases savings increases therefore net capital outflow increases.