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Chapter 10: Q. 12 (page 266)

If a country is running a government budget surplus, why is (T 鈥� G) on the left side of the saving investment identity?

Short Answer

Expert verified

The government when running a budget surplus, it implies it is spending less and hence, the budget is in surplus. Hence, T-G implies that surplus.

Step by step solution

01

Step1. Introduction

The savings-investment identity is-

(S-I) = (X-M) + (G-T)

S- Savings

I- Investments

X- Exports

M- Imports

X-M= Trade Balance

G- Government Expenditure

T- Taxation

02

Step2. Explanation

When G-T is on the right hand side, it implies the earnings through taxation is less than the government spending, implying a government budget deficit.

When we take G-T to left, it becomes T-G as according to simple mathematical operations. Now, T-G implies T is greater than G, hence government when runs a budget surplus, T-G is on the left hand side of the identity equation.

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Most popular questions from this chapter

What determines the size of a country鈥檚 trade deficit?

What is included in the current account balance?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany鈥檚 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 current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?

Why does the trade balance and the current account balance track so closely together over time?

If you observed a country with a rapidly growing

trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid growth? Explain.
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