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Scenario: Open Economy S = I
In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion.
-(Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is the net capital inflow?

Question

Quizplus · Accepted Answer

In an open economy with S = I, Net Capital Inflow (NCI) is given by
NCI = S – I + (T – G)
where S = investment, I = national saving, T = tax revenue, and G = government spending.

Here, S = I (given in the scenario).
Hence, NCI = (T – G)
Now, T = 0.5 trillion and G = 2 trillion
Therefore, NCI = 0.5 – 2 = –1.5 trillion

Since NCI is negative, it means there is a Net Capital Outflow (NCO).
The absolute value of NCO = 1.5 trillion.
Since NCO = (X – M) = (1 – 3) trillion = –2 trillion
Therefore, the Net Capital Inflow (NCI) = 2 trillion.

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