The National Saving and Investment Identity

Problems

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $100 billion, total domestic savings of $1,500 billion, and total domestic physical capital investment of $1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by $50 billion, while the budget deficit and national savings remain the same?

Table provides some hypothetical data on macroeconomic accounts for three countries represented by A, B, and C and measured in billions of currency units. In Table, private household saving is SH, tax revenue is T, government spending is G, and investment spending is I.

A B C
SH 700 500 600
T 00 500 500
G 600 350 650
I 800 400 450
Macroeconomic Accounts
  1. Calculate the trade balance and the net inflow of foreign saving for each country.
  2. State whether each one has a trade surplus or deficit (or balanced trade).
  3. State whether each is a net lender or borrower internationally and explain.

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is 18% of GDP.

  1. Based on the national saving and investment identity, what is the current account balance?
  2. If the government budget surplus falls to zero, how will this affect the current account balance?