Question

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by \)50 billion, while the budget deficit and national savings remain the same?

Short answer

$200 billion

later, $250 billion.

Step-by-step solution

Step1. Given Information

In the US economy,

Government budget deficit = $100 billion

Total domestic physical capital investment = $1600 billion

Total domestic savings = $1500 billion

Step2. Explanation

So current account balance:

Supply of financial capital = demand of financial capital

savings + current account deficit = government borrowings + physical investment

$$\begin{gathered} \$1500billion+currentaccountdeficit=\$100billion+\$1600billion \\ \$1500billion+currentaccountdeficit=\$1700billion \\ Currentaccountdeficit=\$200billion \end{gathered}$$

When investment rises by $50 billion, the total domestic physical capital increased to $1650 billion

Current account balance is:

Supply of financial capital = demand of financial capital

Savings + current account balance = government borrowings + physical investment

$$\begin{gathered} \$1500billion+currentaccountbalance=\$100billion+\$1650billion \\ Currentaccountbalance=\$1750billion-\$1500billion \\ Currentaccountbalance=\$250billion. \end{gathered}$$