Imagine that the economy of Germany finds itself in the following situation: the
ID: 1105149 • Letter: I
Question
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.
a) Based on the national saving and investment identity, what is the trade balance? The trade balance is _____ of GDP.
b) If the government budget surplus falls to zero, how will this affect the trade balance? The trade balance will (increase/decrease) ___decrease___by ______% to ______% of GDP
c) Now, assuming there is no income from abroad or net transfers, what is the current account balance? The current account balance is ______% of GDP, which means there is a (deficit/surplus)_____
Explanation / Answer
Use the relationship (G-T) = (S-I)-NX
Where G-T is the budget deficit and S is ptivatesavings and I is the investment .
a) (G-T) =-0.1Y, S=0.2Y, I =0.18Y, Substituting the value
NX = 0.1Y+0.02Y = 0.12Y
Trade Balance is 12% of GDP.
b) if (G-T) =0, Trade balance will decrease by 10% to 2 %of GDP.(USE the equation given above)
c) Current account is equal to trade balance . The current account balance is positive so it is in surplus.