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2 October, 03:43

A country finds itself in the following situation: a government budget surplus of $900; total domestic savings of $200, and total domestic physical capital investment of $1300. According to the national saving and investment identity, if investment decreases by $300 while the government budget deficit and savings remain the same, what will happen to the current account balance?

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  1. 2 October, 03:49
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    The current account balance goes from a $200 deficit, to a $100 surplus.

    Explanation:

    There are several ways to write the national saving and investment identity. We can choose to write it in this way:

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

    Because the equation is an identity, we know that the left side of it (X - M) will always be equal to the right side (S + (T - G) - I), on which we wil be focusing.

    With the initial values provided by the question, we have the following situation:

    (X - M) = $200 + $900 - $1,300

    (X - M) = $1,100 - $1,300

    (X - M) = - $200

    Thus, we have a deficit of $200

    If investment decreases by $300, while the government budget, and savings remain the same, the situation changes:

    (X - M) = $200 + $900 - $1,000

    (X - M) = $1,100 - $1,000

    (X - M) = $100

    So now we have a surplus of $100
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