If a country has Y C + I + G, then

Question

If a country has Y > C + I + G, then a. S < I and it has a trade surplus. b. S > I and it has a trade surplus. c. S > I and it has a trade deficit. d. S < I and it has a trade deficit.

GPT-4o mini · Answer

To analyze the situation described with the inequality $Y > C + I + G$ , let's break it down:

Y is the national income (or output).
C is consumption.
I is investment.
G is government spending.
S represents savings.

According to the national income identity:

$Y = C + I + G + (X - M)$

Where $X$ is exports and $M$ is imports. The term $(X - M)$ represents net exports, which is the trade balance.

Given $Y > C + I + G$ , we can rearrange it to:

$Y - (C + I + G) > 0$

This implies that:

$X - M > 0$

Which means that net exports (exports minus imports) are greater than zero. This indicates a trade surplus.

Now, considering the savings-investment relationship:

If $Y > C + I + G$ , it means that the income (Y) is greater than the total spending (including consumption, investment, and government spending), which implies that savings must be greater than investment (since additional income must be saved if it is not spent).

Thus:

S > I (savings are greater than investment)
Trade surplus (because $Y > C + I + G$ )

Now, looking at the options provided:

a. S < I and it has a trade surplus. - Incorrect b. S > I and it has a trade surplus. - Correct c. S > I and it has a trade deficit. - Incorrect d. S < I and it has a trade deficit. - Incorrect

The correct answer is:

b. S > I and it has a trade surplus.