Question

Given the following information about the open economy of Regalia, what is the level of investment spending and private savings, and what are the budget balance and net capital inflow? What is the relationship among the four? There are no government transfers. (Hint: net capital inflow equals the value of imports (IM) minus the value of exports \((X) .)\) GDP \(=\$ 1,000\) million \(\quad G=\$ 100\) million \(C=\$ 850\) million \(\quad X=\$ 100\) million \(T=\$ 50\) million \(I M=\$ 125\) million

Short answer

Answer: In the open economy of Regalia, the level of investment spending (I) is $75 million, private savings (S) is $100 million, budget balance is -$50 million, and net capital inflow is $25 million.

Step-by-step solution

Find Investment (I)

To find the level of investment spending, we will use the first equation: GDP = C + I + G + (X - IM). Plugging in the given values, we get: \(1,000 = 850 + I + 100 + (100 - 125)\) This simplifies to: \(I = 1,000 - 850 - 100 - (-25) = 75\)

Find Private Savings (S)

To find private savings, we will use the second equation: S = Y (GDP) - C - T. Plugging in the given values, we get: \(S = 1,000 - 850 - 50 = 100\)

Find Budget Balance

To find the budget balance, we will use the third equation: Budget Balance = T - G. Plugging in the given values, we get: Budget Balance \(= 50 - 100 = -50\)

Find Net Capital Inflow

To find the net capital inflow, we will use the fourth equation: Net Capital Inflow = IM - X. Plugging in the given values, we get: Net Capital Inflow \(= 125 - 100 = 25\) To summarize: - Investment spending (I) = $75 million - Private savings (S) = $100 million - Budget balance = $-50 million - Net capital inflow = $25 million The relationship among these four variables can be derived from the national income identity for an open economy: \(S - I = (T - G) + (IM - X)\) Plugging in the obtained values, we get: \(100 - 75 = (-50) + 25\) \(25 = 25\) This verifies the relationship among private savings, investment spending, budget balance, and net capital inflow in the economy of Regalia.