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Question
Statistics
Posted 10 months ago

Elements of national income accounting can be abbreviated as shown in the table below.
\begin{tabular}{|c|c|c|c|c|c|c|c|}
\hline Abbreviation & Y & C & T\mathrm{T} & G & I & NXN X & NCl\mathrm{NCl} \\
\hline Meaning & \begin{tabular}{l} 
national \\
income
\end{tabular} & consumption & taxes & \begin{tabular}{l} 
government \\
spending
\end{tabular} & investment & \begin{tabular}{l} 
net \\
exports
\end{tabular} & \begin{tabular}{l} 
net \\
capital \\
inflows
\end{tabular} \\
\hline
\end{tabular}

Which of the following equations represents the relationship between savings and investment in a closed economy?

Choose 1 answer:
(A) T−G=IT-G=I
(B) Y−C−T=IY-C-T=I
(C) (Y−C−T)+(T−G)=I(Y-C-T)+(T-G)=I
(D) (Y−C−T)+(T−G)+NCI=I(Y-C-T)+(T-G)+N C I=I
(E) NCI=IN C I=I
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
In a closed economy, net exports (NX) are zero because there is no trade with other economies. Therefore, the term involving NX can be ignored in the national income accounting identity
step 2
The national income accounting identity in a closed economy is given by: Y=C+I+G Y = C + I + G where Y Y is the national income, C C is consumption, I I is investment, and G G is government spending
step 3
Savings in a closed economy can be defined as the national income that is not consumed or spent by the government: S=Y−C−G S = Y - C - G
step 4
Taxes T T are collected by the government, and the difference between taxes and government spending (T−G) (T - G) represents public saving
step 5
Adding public saving to private saving, we get total saving in the economy: S=(Y−C−G)+(T−G) S = (Y - C - G) + (T - G) Simplifying, we get: S=(Y−C−T)+(T−G) S = (Y - C - T) + (T - G)
step 6
In a closed economy, total savings is equal to investment: S=I S = I Therefore, substituting the expression for S S from step 5, we get: (Y−C−T)+(T−G)=I (Y - C - T) + (T - G) = I
Answer
The correct equation that represents the relationship between savings and investment in a closed economy is given by option (C): $$ (Y - C - T) + (T - G) = I $$
C
Key Concept
National Income Accounting Identity in a Closed Economy
Explanation
In a closed economy, total savings (private plus public) equals investment, and net exports are zero. The identity is represented by the equation (Y−C−T)+(T−G)=I (Y - C - T) + (T - G) = I , where Y Y is national income, C C is consumption, T T is taxes, G G is government spending, and I I is investment.

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