Question

Suppose that in an economy private saving is 200 and private investment is 50. At the same time, public sector saving is -300 and public investment is 100.

Compute the private sector saving–investment balance:

Compute the public sector saving–investment balance:

Compute the current account balance:

Answer 1

(1) Public sector savings-investmet balance is given by the difference between public savings and public investment.

Given that Public savings = -300 and Public investments = 100

Thus, public sector savings-investmet balance = Public savings - Public investments = -300-100 = -400

(2) Private sector savings-investmet balance is given by the difference between private savings and private investment.

Given that Private savings = 200 and Private investments = 50

Thus, public sector savings-investmet balance = Private savings - Private investments = 200 - 50 = 150

(3) Current account balance is the difference between te exports ans imports of goods and services of a country.

CA = EX - IM

where CA = current account, EX = total exports and IM = total imports

Now, the national income identity is given by

Y = C + I + G + (EX-IM)

EX - IM = Y - C - I - G

CA = (Y - T - C) + (T - G) - I : addition and subtraction of T i.e. taxes on the right hand side.

CA = S - I

where (Y - T - C) are savings of the private sector and (T - G) are the savings of public sector.

So, S = total savings = public sector savings + private sector savings = (-300) + 200 = -100

and I = total investment = public sector investments + private sector invetments = 100 + 50 = 150

Thus, CA = -100 - 150 = - 250

The other way of calculating CA is

CA = public sector savings-investment balance + private sector savings-investment balance = -400 + 150 = -250

The currenct account balance is in deficit.