# Assume this is a closed economy a) What are investment and savings? b) Show the relevant algebra...

## Question:

Assume this is a closed economy

Output | $800 |
---|---|

Consumption | 640 |

Government revenue | 80 |

Government expenditure | 120 |

Investment | |

Savings |

a) What are investment and savings?

b) Show the relevant algebra and the calculations that you used for each one

## Closed Economy:

In economics, a closed economy is defined as a country which is not opened to trade (no exports nor imports). These countries are self-sufficient and provide with all the necessary goods or services produced within the country to the domestic consumers.

## Answer and Explanation:

Assuming a closed economy, the GDP (output) equation is the following:

{eq}Y= C+I+G {/eq}

Where,

- Y= output/GDP
- C= consumption
- I=investment
- G= government spending

If we rearrange the previous formula to solve for I (investment), the equation would look as follows:

{eq}I=Y-C-G {/eq}

Please note that the left side of the equation (Y-C-G) is equal to national savings, which complies with the identity that states that national savings is equal to investments (S=I) in a closed economy.

Knowing this, we can solve the investment equation, that will provide us with the investment (I) result and as a consequence the savings (S) result.

{eq}I=$800-$640-$120 {/eq}

{eq}I=$40 {/eq}

Therefore, **investment is $40** which is equal to **savings that is $40** (based on the identity S=I in a closed economy).

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from CLEP Social Sciences and History: Study Guide & Test Prep

Chapter 59 / Lesson 2