MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
Question
Book Icon
Chapter 20, Problem 3TY

a)

To determine

To compute: The equilibrium GDP, the budget surplus or deficit and the trade surplus or deficit.

a)

Expert Solution
Check Mark

Answer to Problem 3TY

The equilibrium GDP has been derived as 3,240 and it has been found that the budget as well as the trade is deficit.

Explanation of Solution

The monetary value of finished goods and services, being produced in a particular time frame, in an economy, is called the Gross Domestic Product or GDP.

The GDP is calculated as follows:

  Y=C+I+G+NX ……………………….. Eq (1)

Where Y is the output level, C the consumption, I the investment, G the Governmental expenditure and NX is the net export. It is given that:

  C=150+0.75DII=300+0.2Y50rX=300IM=250+0.2YG=800

  T=0.20Yr=0.08Y

By substituting the values in Eq (1), the equilibrium level of GDP can be calculated:

  Y=C+I+G+NX

  Y=(150+0.75DI)+(300+0.2Y50r)+800+{300{250+0.2Y}}

As the rate of interest is 8 percent and DI is the difference between income and tax, the above equation can be modified as:

  Y=(150+0.75(YT))+(300+0.2Y50(0.08))+800+{300{250+0.2Y}}  =(150+0.75(Y0.20))+(300+0.2Y50(0.08))+800+{300{250+0.2Y}}  =(150+0.75Y0.15Y))+(300+0.2Y4))+800+{300{250+0.2Y}}  =(150+300+800+3004250+0.75Y0.15Y0.2Y+0.2Y)  =(150+300+800+3004250+0.6Y)  =(1,296+0.6Y)

Simplifying further by bringing the variable on to the left hand side:

    Y0.6Y=1,296Y(10.6)=1,296        0.4Y=1,296             Y=1,2960.4               =3,240

Thus the equilibrium level of GDP has been derived as 3,240 .

When the total collected tax is greater than the expenditure by Government, then that budget is said to be surplus budget, and when the Governmental expenditures are more than the collected tax, then that budget is called a deficit budget. Therefore:

Surplus Budget =(TG)>0

Deficit Budget =(TG)<0

Wherein G is the Governmental expenses and T is the tax collected. Substituting T=0.20Y and G=800 in the above equation in order to determine as to whether the budget is surplus or deficit:

  TG=0.20(Y)800         =0.20×3240800         =152

Since it is negative value at 152 , the Governmental expenditures is exceeding the revenue from tax, and hence it could be concluded that it is a deficit budget.

When the net export is positive it is called as a trade surplus and when it is negative it is called as a trade deficit. Following is the equation:

  NX=300(250+0.2Y)      =300(250+0.2×3240)      =598

Since it is a negative value at 598 , it could be concluded that the country is facing a trade deficit.

b)

To determine

The equilibrium GDP, the budget surplus or deficit and the trade surplus or deficit, as per the data given.

b)

Expert Solution
Check Mark

Answer to Problem 3TY

The equilibrium GDP has been derived as 3,740 and it has been found that the budget as well as the trade is deficit.

Explanation of Solution

The monetary value of finished goods and services, being produced in a particular time frame, in an economy, is called the Gross Domestic Product or GDP.

The GDP is calculated as follows:

  Y=C+I+G+NX ……………………….. Eq (1)

Where Y is the output level, C the consumption, I the investment, G the Governmental expenditure and NX is the net export. It is given that:

  C=150+0.75DII=300+0.2Y50rX=250G=800

  T=0.20Yr=0.08Y

By substituting the values in Eq (1), the equilibrium level of GDP can be calculated:

  Y=C+I+G+NX

  Y=(150+0.75DI)+(300+0.2Y50r)+800+(2500.2Y)

As the rate of interest is 8 percent and DI is the difference between income and tax, the above equation can be modified as:

  Y=(150+0.75(YT))+(300+0.2Y50(0.08))+800+(2500.2Y)  =(150+0.75(Y0.20))+(300+0.2Y50(0.08))+800+(2500.2Y)  =(150+0.75Y0.15Y))+(300+0.2Y4))+800+(2500.2Y))  =(150+300+800+2504+0.75Y0.15Y0.2Y+0.2Y)  =(150+300+800+2504+0.6Y)  =(1,496+0.6Y)

Simplifying further by bringing the variable on to the left hand side:

    Y0.6Y=1,496Y(10.6)=1,496        0.4Y=1,496             Y=1,4960.4               =3,740

Thus the equilibrium level of GDP has been derived as 3,740 .

When the total collected tax is greater than the expenditure by Government, then that budget is said to be surplus budget, and when the Governmental expenditures are more than the collected tax, then that budget is called a deficit budget. Therefore:

Surplus Budget =(TG)>0

Deficit Budget =(TG)<0

Wherein G is the Governmental expenses and T is the tax collected. Substituting T=0.20Y and G=800 in the above equation in order to determine as to whether the budget is surplus or deficit:

  TG=0.20(Y)800         =0.20×3740800         =52

Since it is negative value at 52 , the Governmental expenditures is exceeding the revenue from tax, and hence it could be concluded that it is a deficit budget.

When the net export is positive it is called as a trade surplus and when it is negative it is called as a trade deficit. Following is the equation:

  NX=(2500.2Y)      =(2500.2×3740)      =498

Since it is a negative value at 498 , it could be concluded that the country is facing a trade deficit.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
1. Answer the following: A) In 2011 the United States economy had a GDP of $14,991 billion according to the United Nations. If consumption was $10,729 billion, government spending was $2,594 billion, and net exports was -$568 billion, how much was investment spending? B) In 2011 the United States economy had a GDI (Gross Domestic Income) of approximately $13,548 billion according to the Bureau of Economic Analysis. If wages were $8,340 billion, interest payments were $516 billion, and rent was $430 billion, approximately how much was remaining for profit?
Question attahed in image
Suppose that the following equations describe the economy of the country of the Philippines.C= 500 + 0.8 (Y – T), I= 200, G= 300, NX= 50, T= 200, Yf= 5000; where C=consumption level, I=investment, G=government expenditures, NX=net exports, T=taxes and Yf=full employment output/income.Use this information to find each of the following:4.1. Investment, government and tax multiplier.4.2. Equilibrium output/income.4.3. The output gap.4.4. By how much would government expenditures have to change to eliminate the output gap?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education