Question

Assume that Zambia has a domestic investment of $1500 billion, private domestic savings of $3000 billion, and a government deficit of $2000 billion. Based on the national saving and investment identity, what is Zambia's trade deficit if government spending rises by $1000 billion? Enter your answer in billions of dollars.

Answer 1

Answer:

$1,500

Explanation:

Domestic investment = $1500 billion

Private domestic savings = $3000 billion

Government deficit = $2000 billion

Rise in government spending = $1000 billion

Now,

Trade deficit =

Domestic investment - Private domestic saving - Government savings

also,

Total Government deficits = $2,000 + $1000

= $3,000

and,

Government savings = - Government deficits

= - $3,000

Now we know government deficit is 3000 billion and if spending increases further 1000 billion, the government deficit will be 4000 billion

thus,

Trade deficit = $1,500 - $3,000 - (- $3,000)

or

= $1,500