Consider a closed economy with national saving of $2 trillion, consumption of $16 trillion, and government purchases of $5 trillion. What the economy's is GDP?
Question
Consider a closed economy with national saving of 16 trillion, and government purchases of $5 trillion. What the economy's is GDP?
Solution 1
In a closed economy, the Gross Domestic Product (GDP) is the sum of consumption, investment, and government purchases.
Given that the national saving is 16 trillion, and government purchases are $5 trillion, we can use the identity that in a closed economy, national saving equals investment.
So, the investment in this economy is $2 trillion (equal to national saving).
Now, we can calculate the GDP using the formula:
GDP = Consumption + Investment + Government Purchases
Substituting the given values into the formula, we get:
GDP = 2 trillion (Investment) + $5 trillion (Government Purchases)
So, the GDP of the economy is $23 trillion.
Solution 2
In a closed economy, the Gross Domestic Product (GDP) is the sum of Consumption (C), Investment (I), and Government Spending (G).
The formula is: GDP = C + I + G
From the question, we know that Consumption (C) is 5 trillion.
We also know that in a closed economy, Investment (I) is equal to National Savings. So, Investment (I) is $2 trillion.
Substituting these values into the formula, we get:
GDP = C + I + G GDP = 2 trillion + 23 trillion
So, the GDP of the economy is $23 trillion.
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