Chapter 25, Problem 3P

To determine

The budget balance of both countries given.

Concept Introduction:

Open Economy: The economy in which there is no restriction on trade which means that there exists import and export. Such economy is referred to as Open Economy.

Investment spending: All those spending which are done on new physical capital which means that only expenses that increase economy level of physical capital is known as investment spending.

The formula to calculate investment spending is:

Here,

• I is investment spending.
• GDP is gross domestic product.
• C is consumption spending.
• G is government spending.
• IM is quantity of import.
• X is quantity of export.

Private Saving: It is the saving made by people for times of emergency or bad financial conditions.

The formula to calculate private saving is:

Here,

• T is tax revenue.
• C is consumption spending.

Budget Balance: The budget is considered to be balanced when revenue collected from tax and expenditures made by government are equal. When it is deficit it is represented by a negative value, when it is surplus it is represented by a positive value and in case of balanced budget it is zero.

The formula to calculate budget balance is:

Here,

• T is tax revenue.
• G is government spending.

Net Capital Inflow: It is the total amount of incoming of all the financial assets into a country which is then deducted from the total outgoing of financial assets out of a country.

The formula to calculate net capital inflow is: