Question

In a small, closed economy, national income (GDP) is $500 million for the current quarter. Individuals have spent $300 million on the consumption of goods and services. They have paid a total of $200 million in taxes and the government has spent $150 million on goods and services this quarter. Use this information and the national income identity to answer the questions. How much does the economy spend on investment? I= million dollars What is national saving in the economy? S= million dollars How are investment and national saving related in an economy like this? Investment and national saving are unrelated. Investment is a component of national saving. National saving is always less than investment. National saving equals investment.

Answer 1

Answer:

The answers are:

1. Investment = $50 millions
2. National saving = $50 millions
3. National saving equals investment.

Explanation:

The formula for calculating GDP is:

GDP = C + I + G + (X - M)

Since this is a closed economy, both X and M equal 0.

$500MM = $300MM + I + $150MM

I = $500MM - $300MM - $150MM = $50MM

Since national saving equals investment, then national saving is $50MM