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If GDP = $1,000, consumption = $600, taxes = $100, and government purchases = $200, how much is saving and investment?

a. saving = $200, investment = $100
b. saving = $0, investment = $0
c. saving = $300, investment = $300
d. saving = $200, investment = $200
e. saving = $100, investment = $200

1 answer

To determine how much is saving and investment based on the provided figures, let's analyze the situation step-by-step given the GDP identities.

  1. Identify Key Variables:

    • GDP (Y) = $1,000
    • Consumption (C) = $600
    • Taxes (T) = $100
    • Government Purchases (G) = $200

  2. Calculate Total Income: GDP represents the total income in the economy, which is $1,000.

  3. Calculate Savings: We know that savings (S) in a simple economy without foreign trade can be expressed as: \[ S = Y - C - T \] Plugging in the values: \[ S = 1000 - 600 - 100 = 300 \]

  4. Calculate Investment: In a closed economy (no foreign trade), savings must equal investment (I): \[ S = I \] Therefore, investment is also $300.

  5. Final Values:

    • Saving = $300
    • Investment = $300

So the correct answer is c. saving = $300, investment = $300.