Question

In a small, closed economy, national income (GDP) is $500.00 million for the current year. Individuals have spent $300.00 million on the consumption of goods and services. They have paid a total of $200.00 million in taxes, and the government has spent $150.00 million on goods and services this year. Use this information and the national income identity to answer the questions. How much is spent on investment in this economy? investment: $ million What is national saving in this economy? saving: $ million How are investment and national saving related in an economy like this? National saving equals investment. Investment is a component of national saving. National saving is always less than investment. They are unrelated.

Answer 1

Answer:

In a closed economy,

GDP = Y = C + I + G

where,

C = Consumption of households on goods and service

I = investment

G = government expenditure on goods and services

Macroeconomic households generally used their personal disposable income (after tax income) to consume and save.

Therefore, GDP is either consumed by the individuals, invested by the companies or purchases by the government.

We make an assumption that households utilize their disposable income to consume and save.

Therefore, C + I + G = C + S + T

Hence,

             GDP = Y = C + I + G

$500 million = $300 million + I + $150 million

                    I = 500 - 300 - 150

                     = $50.

(1) $50 million spend on investment.

(2) I = S

Hence, National savings = $50

(3) Option (a) is correct.

In this economy, National savings is equal to investment.