5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = results in the following relationship: S = This is equivalent to S = . Therefore, national Outcomes of a Trade Deficit Exports 0 Y Investment Net Capital Qutflow Imports Net Exports C+I+G Saving 0 . Plugging this into the original equation showing the various components of GDP , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing a trade deficit. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to).
5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = results in the following relationship: S = This is equivalent to S = . Therefore, national Outcomes of a Trade Deficit Exports 0 Y Investment Net Capital Qutflow Imports Net Exports C+I+G Saving 0 . Plugging this into the original equation showing the various components of GDP , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing a trade deficit. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to).
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:5. Saving and net flows of capital and goods
In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore
how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between
these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your
analysis.
Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where
C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports:
Y
Also, national saving is the income of the nation that is left after paying for
saving (S) is defined as:
S =
Rearranging the previous equation and solving for Y yields Y =
results in the following relationship:
S =
This is equivalent to S =
. Therefore, national.
Outcomes of a Trade Deficit
Exports
0
Y
Investment
Net Capital Outflow
Imports
Net Exports
C+I+G
Saving
0
. Plugging this into the original equation showing the various components of GDP
, since net exports must equal net capital outflow (NCO, also known as net foreign investment).
Now suppose that a country is experiencing a trade deficit. Determine the relationships between the entries in the following table, and enter these
relationships using the following symbols: > (greater than), < (less than), or = (equal to).
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