Suppose a country has a large current account deficit (in the vicinity of 12% of GDP). It has a gross capital formation rate of 28% of GDP. The country has an overall budget deficit of 3% of GDP. The share of Household and NPISHs Final Consumption Expenditure is 68% of GDP and that of General Government Final Consumption Expenditure is 12%. What proportion of this country’s total gross capital formation (or investment) can be financed from national savings and what part must be financed from external resources? What are the various forms these external resources could take?

Suppose a country has a large current account deficit (in the vicinity of 12% of GDP). It has a gross capital formation rate of 28% of GDP. The country has an overall budget deficit of 3% of GDP. The share of Household and NPISHs Final Consumption Expenditure is 68% of GDP and that of General Government Final Consumption Expenditure is 12%. What proportion of this country’s total gross capital formation (or investment) can be financed from national savings and what part must be financed from external resources? What are the various forms these external resources could take?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 6SCQ: A booming economy can attract financial capital inflows, which promote further growth. However,...

See similar textbooks

Similar questions

Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 40 25 -15 6 35 30 -10 5 30 35 -5 4 25 40 0 3 20 45 5 2 15 50 10 On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. Because of the…
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 50 30 -20 6 45 40 -15 5 40 50 -10 4 35 60 -5 3 30 70 0 2 25 80 5 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable…
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 40 30 -20 6 35 35 -15 5 30 40 -10 4 25 45 -5 3 20 50 0 2 15 55 5 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Because of the relationship between net capital outflow and net…
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 55 25 -10 6 50 35 -5 5 45 45 0 4 40 55 5 3 35 65 10 2 30 75 15 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.
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 trade balance? What will be the trade balance if investment rises by $50 billion, while the budget deficit and national savings remain the same?
Other things equal, when the government runs a large budget deficit, it _____ national saving and thereby _____ capital formation and productivity growth. a) increase;increase b)decreases;decreases c)increase;decreases d;decreases;increases
Suppose a country was facing the problem of budget deficit and by reducing government expenditures the government has achieved the target of balanced budget. With the help of appropriate diagrams explain how a country’s shift from budget deficit to balanced budget would affect its investments, economic growth, net capital outflow and currency exchange rate?
Suppose the government can borrow funds in large global capital markets. This means that a.all of them b.as long as the deficit is not “too large” the government can borrow without crowding out private investment. c.too much borrowing that results in foreigners halting their lending to the government could lead to a sudden spike in domestic interest rates. d.interest rates are lower in the domestic market than otherwise.
Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing (Balanced trade/ a trade deficit/ a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ( National saving will increase/ national saving will decrease/ Domestic investment will increase / domestic investment will decrease) which leads to ( an increase in the supply of / a decrease in the supply of / an increase in the demand for/ a decrease in the demand for) loanable funds. After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market. Use the green line (triangle symbol) to show the supply curve in this market before the budget deficit. Then use the purple line (diamond symbol) to show the supply curve after the budget deficit. Summarize the…
Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing___________ .Now, suppose the government is experiencing a budget deficit. This means that _________, which leads to ___________loanable funds.After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market.
. The government has proposed Rs1,289 billion for the defence budget for the year 2020-21, 5.1% more compared to last year’s revised defence estimates of Rs1,227 billion for the year 2019-20. If Government cut defence Budget, what happens to saving, investment, the trade balance, the interest rate, inflation rate and the exchange rate? And similarly, Government decreases the interest rate due to COVID-19 so explain what impact on consumption, investment and interest rate. Justify the answer with your own word and examples.
Consider the following data (in billion $) for a country in a particular year: (assume this country has Zero Transfer Payment Personal consumption expenditure (C) 200 Exports (x) 10 Government Purchases of goods and services (G) 120 Imports (m) 15 Gross Domestic Product (Y) 1800 Taxes 20 d. What is the value of gross investment? e. What is the value of net export? f. Is the country lending to or borrowing from rest of the world? g. Dose the government has deficit, balance or surplus budget? h. What is the amount of investment financed by national saving? i. What is the amount of investment financed by borrowing from rest of the world? J. What is the meaning of transfer payment