Suppose a small closed economy has GDP of $5 billion, consumption of $3 billion, and government expenditures of $1 billion. Then investment and national saving are both $1 billion.

Question

Quizplus · Accepted Answer

In a closed economy, GDP is equal to the sum of consumption, investment, and government expenditures. Therefore, if GDP is $5 billion, consumption is $3 billion, and government expenditures are $1 billion, investment must be $1 billion to balance the equation ($5 billion = $3 billion + $1 billion + $1 billion). National saving is the sum of private saving and government saving, which is GDP minus consumption and government expenditures ($5 billion - $3 billion - $1 billion = $1 billion). Thus, both investment and national saving are $1 billion.

Suppose a Small Closed Economy Has GDP of $5 Billion