Supposed GDP is $800 billion, taxes are $150 billion, private saving is $50 billion, and public...

Question:

Supposed GDP is $800 billion, taxes are $150 billion, private saving is $50 billion, and public saving is $20 billion. Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.

Gross Domestic Product:

  • The gross domestic product (GDP) is the value of all the final goods and services that are produced within the borders of a country for a given period of time, usually one year. The common approaches that are used in the determination of a countries GDP are income approach and expenditure approach.

Answer and Explanation:


Using the expenditure approach, for a closed economy, the GDP is given by:

  • {eq}Y = C + I + G {/eq}

Where {eq}C {/eq} is the consumption spending, {eq}I {/eq} is the investment spending and {eq}G {/eq} is the government spending on goods and services.

Given that:

  • {eq}Y = \$800\\ T = \$150\\ S_{private} = \$50\\ S_{public} = \$20 {/eq}

We know that private saving is the amount saved by individuals after paying their taxes and consumption expenditures. It is given by;

  • {eq}S_{private} = Y - T - C {/eq}

Therefore:

  • {eq}\$50 = \$800 - \$150 - C {/eq}

Solving for {eq}C {/eq}, we get:

  • {eq}C= \$800 - \$150 - \$50 = \boxed{\color{blue}{\$600}} {/eq}

Public saving is the tax revenue over and above the government purchases. It is given by:

  • {eq}S_{private} = T - G {/eq}

Therefore:

  • {eq}\$20 = \$150 - G {/eq}

Solving for {eq}G {/eq}, we have:

  • {eq}G = \$150 - \$20 = \boxed{\color{blue}{\$130}} {/eq}

National saving is the sum of private saving and public saving. Therefore:

  • {eq}S_{national} = S_{private} + S_{public} {/eq}
  • {eq}S_{national} = \$50 + \$20 = \boxed{\color{blue}{\$70}} {/eq}
  • {eq}Y = C + I + G {/eq}

Thus:

  • {eq}\$800 = \$600 + I + \$130 {/eq}

Therefore:

  • {eq}I = \$800 - \$600 - \$130 = \boxed{\color{blue}{\$70}} {/eq}

Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
66K

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