Chapter 8, Problem 4PA

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

Chapter
Section

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose GDP is $8 trillion, taxes are$1.5 trillion, private saving is $0.5 trillion, and public saving is$0.2 trillion. Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.

To determine

The consumption, government purchases, national savings and investment.

Explanation

The savings is the revenue left after the spending. There are mainly three types of incomes and they are the private income, government income and national income. The personal income refers to the income of the individual or the consumer. When the personal income tax is paid out of the income of the individual, the remaining part is known as the private savings.

The government savings is the savings left with the government after the different spending of the government. The income of the government is the tax revenue collected by the government. The spending of the government includes different spending of the public programs. The remaining portion of the government income after the spending is known as the government savings. The national saving on the other hand is the summation of the private savings and government savings.

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipments and the buildings and so forth.

Here, it is given that the GDP of the economy is $8 Trillion, taxes are$1.5 trillion, private savings is $0.5 trillion and the public savings is$0.2 trillion. It is also explained that the economy is a closed economy. It is required to calculate the consumption, government purchases, national savings and investment of the closed economy.

The consumption of the economy can be calculated by rearranging the equation for private savings as the following:

PrivateĀ SavingsĀ (SP)=GDP(Y)āTaxes(T)āConsumption(C)C=YāTāSP=8ā1

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