Chapter 25, Problem 4P

To determine

The required answers according to the given data.

a. The level of private savings.

Explanation of Solution

Given,

Export is $125 million.

Import is $80 million.

Budget balance is $-\$200$ million.

Investment spending is $350 million.

The formula to calculate net capital inflow is:

$\text{Net}\text{Capital}\text{Inflow}=IM-X$

Substitute $80 million for IM and $125 million for X.

$\begin{array}{c}\text{Net}\text{Capital}\text{Inflow}=\text{\$80}\text{million-\$125}\text{million}\\ =-\text{\$45}\text{million}\end{array}$

The formula to calculate private saving is:

$\text{Private}\text{Saving}=\text{Investment}\text{Spending}-\text{Budget}\text{Balance}-\text{Net}\text{Inflows}$

Substitute $350 for investment spending, $-\$200$ for budget balance and $-\$45$ for net inflows:

$\begin{array}{c}\text{Private}\text{Saving}=\text{\$350}\text{million}-\left(-\$200\right)\text{million}-\left(-\$45\right)\text{million}\\ =\$350\text{million}+\$200\text{million}+\$45\text{million}\\ =\$595\text{million.}\end{array}$

Economics Concept Introduction

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:

Investment Spending = Private Saving + Budget Balance + Net Inflows

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

The formula to calculate private saving is:

Private Saving = Investment Spending - Budget Balance - Net Inflows

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 negative value, when it is surplus it is represented by positive value and in case of balanced budget it is zero.

The formula to calculate budget balance is:

Budget Balance = Investment Spending - Private Saving - Net Inflows

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:

$\text{Net}\text{Capital}\text{Inflow}=IM-X$

Here,

• IM is quantity of imports.
• X is quantity of export.

To determine

b. The level of investment spending.

Explanation of Solution

Given,

Export is $85 million.

Import is $135 million.

Budget balance is $100 million.

Private saving is $250 million.

The formula to calculate net capital inflow is:

$\text{Net}\text{Capital}\text{Inflow}=IM-X$

Substitute $135 million for IM and $85 million for X:

$\begin{array}{c}\text{Net}\text{Capital}\text{Inflow}=\text{\$135}\text{million}-\text{\$85}\text{million}\\ =\$50\text{million}\end{array}$

The formula to calculate private saving is:

$\text{Investment}\text{Spending}=\text{Private}\text{Saving}+\text{Budget}\text{Balance}+\text{Net}\text{Inflows}$

Substitute $250 million for private savings, $100 million for budget balance and $50 million for net inflows.

$\begin{array}{c}\text{Investment}\text{Spending}=\text{\$250}\text{million}+\text{\$100}\text{million}+\text{\$50}\text{million}\\ =\$400\text{million}\end{array}$

To determine

c. The level of budget balance.

Explanation of Solution

Given,

Export is $60 million.

Import is $95 million.

Investment spending is $300 million.

Private saving is $325 million.

The formula to calculate net capital inflow is:

$\text{Net}\text{Capital}\text{Inflow}=IM-X$

Substitute $95 million for IM and $60 million for X:

$\begin{array}{c}\text{Net}\text{Capital}\text{Inflow}=\text{\$95}\text{million}-\text{\$60}\text{million}\\ =\$35\text{million}\end{array}$

The formula to calculate budget balance is:

$\text{Budget}\text{Balance}=\text{Investment}\text{Spending}-\text{Private}\text{Saving}-\text{Net}\text{Inflows}$

Substitute $325 million for private savings, $300 million for investment spending and $35 million for net inflows:

$\begin{array}{c}\text{Budget}\text{Balance}=\$300\text{million}-\text{\$325}\text{million}-\text{\$35}\text{million}\\ =-\$60\text{million}\end{array}$

Thus, budget balance is $-\$60\text{million}$.

To determine

d. The level of net capital flow.

Explanation of Solution

Given,

Investment spending is $400 million.

Budget balance is $10 million.

Private saving is $325 million.

The formula to calculate net capital inflow that is $IM-X$ is:

$IM-X=\text{Investment}\text{Spending}-\text{Private}\text{Saving}-\text{Budget}\text{Balance}$

Substitute $325 million for private savings, $10 million for budget balance and $400 million for investment spending.

$\begin{array}{c}IM-X=\$400\text{million}-\$325\text{million}-\text{\$10}\text{million}\\ =\text{\$65}\text{million}\end{array}$