MacroEconomics 23.3

Suppose an economy has a trade deficit of $300 billion, private domestic savings of $600 billion, a government deficit of $300 billion, and private domestic investment of $600 billion. To reduce the trade deficit to $200 billion, by how many billions of dollars does private domestic savings have to increase?

100 billion, If we replace the values we are given in the question for the components of the savings-investment formula -300=600+(-300)-600 To reduce the trade deficit to $200 billion, (X - M) = S + (T - G) - I-200 = S + (-300)-600−200+300+600 = S 700 = S Savings will have to rise by (700−600) = $100 billion

Trade Deficit Equation

Domestic investment− Private domestic saving− Government (or public) savings ; (M-X) = I - S - (T-G)

In a period of trade deficit, if domestic investment remains the same, private savings increases by $1.2 billion, and public savings remains the same what will happen to the trade deficit?

It will decrease

during an economic boom, Can the increase in private domestic investment be more than the total increase in public and private savings? Could a nation with a trade deficit experience a decrease in that trade deficit?

No, Trade deficit = Domestic investment - Private domestic saving - Government (or public) savings Therefore, if private domestic investment increases more than public and private saving, the trade deficit will increase

When a nation experiences a rising trade deficit, will it lead to a decrease of net inflow of foreign financial capital?

No, When a nation experiences a rising trade deficit, it likely leads to an increase of net inflow of foreign financial capital. The national saving and investment identity teaches that the rest of the economy can absorb this inflow of foreign financial capital in several different ways.

Trade Surplus Equation

Private domestic saving +Public saving − Domestic investment; (X−M)=S+(T−G)−I

Supply of financial capital Demand for financial capital equation

S+(M−X)I+(G−T)

Savings investment formula simplified

Trade Surplus = (X−M) Private Domestic Savings = (S) Private Domestic Investment = (I) Government Budget Surplus (or Balance) = (T−G)

If the domestic investment is less than domestic savings, then...?

exports are greater than imports

Strong economic growth tends to make trade surplus...?

smaller

national savings and investment identity

the total of private savings and public savings (a government budget surplus)

If private and public savings are higher than domestic investment, then...?

there will be extra financial capital to invest abroad