Question

The country of Yokovia does not trade with any other country. Its GDP is $20 billion. Its government collects $2 billion in taxes. Consumption equals $15 billion and investment equals $2 billion. What is public saving in Yokovia, and what is the value of the goods and services purchased by the government of Yokovia?A. 2 billion and -1 billion
B. 1 billion and 1 billion
C. 1 billion and 3 billion
D. 2 billion and 3 billion

Answer 1

Answer:

C. 1 billion and 3 billion

Explanation:

We know from the national accounts identity that in a closed-economy like Yokovia GDP is equal to:

GDP = C + I + G

Where:

• C = Consumption
• I = Investment
• G = Government spending

From the question, we have obtained the information that GDP is $20 billion, Consumption is $15 billion, and Investment is $2 billion. We plug those amounts into the identity:

GDP = C + I + G

$20b = $15b + $2Bb + G

After laying out this information, we can be certain that G (Government spending or Government purchases) equals $3 billion, because otherwise, the equation would not hold true. Thus:

$20b = $15b + $2b + $3b

As for the value of National Saving, we know that National Saving is equal to:

Nationa Salving = Government Purchases - Taxes

                          = $3b - $2b

                          = $1b