Exercise Set 10
THE SAVING-INVESTMENT RELATIONSHIP

I. Objectives

1. To obtain private saving
2. To obtain the budget balance (or government saving)
3. To determine national saving
4. To understand the relationship between saving and investment

II. Data

• Select values for GDP (Y), consumption (C), taxes (T), government expenditure (G), and net exports (X-IM).
• Obtain investment (I), private saving (S_p), budget balance (BB), capital inflows (KA), and national saving (NS).
  [Note: A positive value for KA implies a net capital inflow into the country. For example, if KA = $200 billion, it implies that foreigners are buying $200 billion worth U.S. assets in a given year.]
• Click on Gimme Investment! to confirm your results.
  
  

  Y =

  C =

  T =

  G =

  X-IM =

  I =

  Sp =

  BB =

  KA =

  NS =

III. Questions

1. Given the following data for a closed economy: Y = 1000, C = 850, T = 50, G = 100. (All numbers are in millions of dollars.)
   1. In the model, what is the significance of the economy being closed?
   2. Calculate the amount of investment in the economy.
   3. Determine the amount of private saving in the economy.
   4. Is the government running a budget surplus--or a budget deficit? What is its magnitude?
   5. What is the country's national saving? Is it equal to investment?
2. Suppose the economy in the previous question is engaged in international trade. Assume that the values of Y, C, T and G remain unchanged, but the country's exports are 100 and imports are 125.
   
   1. Calculate the amount of investment in the economy.
   2. Deternine the amount of private saving in the economy.
   3. Is the government running a budget surplus--or a budget deficit? What is its magnitude?
   4. What is the magnitude of the country's foreign capital inflow (or outflow)?
   5. What is the country's national saving? Is it equal to investment?
3. Go back to the data in Question 1. Suppose the government is subject to a balanced-budget requirement, and accordingly reduces its spending by 50. Ceteris paribus, what will happen to investment, private saving and national saving?