Exploring Aggregated Markets

5. In 1963 savings by the private sector in the United States was $95.2 billion. The government ran a deficit of $3.8 billion, and the U.S. invested a net of $3.8 billion in foreign countries. What was gross private investment in the United States in 1963? (Source of data: Economic Report of the President, January 1987, Table B-27, p. 276.)

6. The readings explained a budget constraint for an economy based on the idea that every sale must be matched with a purchase, and any purchase must be matched with a sale. This budget constraint looks at borrowing and lending, which is a form of buying and selling the use of funds. When we aggregate people and institutions that can borrow or lend, we get:

lending by the private sector + lending by the government sector + lending by foreigners = 0

In terms of symbols, this equation becomes:

(Y-C-I) + (Tx-G-Tn)+ NetImports=0

The first term has the income of the private sector less consumption and investment, the two forms of spending it can do. (Notice that Y-C=S, so the first term could be S-I, as it is in the text.) The second term has the revenue of the government (taxes) less what it spends to buy goods and services and less what it gives away (transfers). In the last term, what we import provides revenue to the foreign sector that it can either spend by buying our exports or lend back to us.

a. Suppose in the above equation Y is 1000, C is 800, I is 100, Tx is 300, G is 150, Tn is 150. What must net imports be?
b. In the equation above, one cannot change just one thing. If one item changes, something else must change as well. Suppose that government spending (G) rises to 200. List at least five ways to make this equation come out right.
c. Become an economic theorist. Pick one of the changes from part b and explain why it will happen. (Postulate a chain of cause and effect: Government spending rises. This causes...)

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