Macroeconomics

Modul 3: Economic Policy

IBEP VT2024

Exercises

3. GDP identity
Assume that the world consists of two countries, A and B, and you have the following
information about their economies:

Country A
Investments (I) 50
Government spending (G) 70
Taxes (T) 20

Country B
GDP (Y) 500
Taxes (T) 110
Total savings in the economy* 80
Savings private sector 50
Net exports (NX) 40

*Savings in the private sector + savings in the government sector

Calculate the following:

a) Net exports in Country A

b) Savings in the private sector in Country A
c) Investments in Country B
d) Private consumption in Country B

Answer a)
In this question, it is important to understand that since there are only two countries, the
positive net export in country B must be matched by a negative net export in country A.
The net export in country A is therefore 40.

Answer b)
In the closed economy, we know that saving must equal investment. From the balance
of payments statement, we know that in an open economy, a positive net export must be
matched by an increased holding of foreign assets (usually referred to as financial
savings). In the open economy, net exports, NX= S+(T-G)-I. Which gives that -40=S+(20-
70)-50. Private saving in Country A must therefore be equal to 60.

Answer c)
In Country B, we can start by calculating the investments. We know that NX=Total
Savings (S+(T-G) minus Investments (I), which gives: 40=80-I. Investments = 40.

Answer d)
We can then calculate G. Total savings=80=50+(110-G). G must therefore be equal to 80.
Then use the GDP identity Y=C+I+G+NX. 500=C+40+80+40. C must be equal to 340.