A large open economy has desired national saving of Sd = 1200 + 1000rw,and desired national investment of Id = 1000 - 500rw.The foreign economy has desired national saving of = 1300 + 1000rw,and desired national investment of
= 1800 - 500rw.In equilibrium,the foreign country has net exports equal to
A)500.
B)350.
C)-350.
D)-500.

Question

A large open economy has desired national saving of Sd = 1200 + 1000rw,and desired national investment of Id = 1000 - 500rw.The foreign economy has desired national saving of  = 1300 + 1000rw,and desired national investment of
 = 1800 - 500rw.In equilibrium,the foreign country has net exports equal to
A)500. 
B)350. 
C)-350. 
D)-500.

Quizplus · Accepted Answer

Since this is an open economy, the national saving investment identity is given by:

S = I + NX

where S is national saving, I is national investment, and NX is net exports.

Substituting the given equations,

Sd = 1200 + 1000rw 
Id = 1000 - 500rw 
Sn = 1300 + 1000rw 
In = 1800 - 500rw

we get,

Sd + Sn = Id + In + NX 
=> 1200 + 1000rw + 1300 + 1000rw = 1000 - 500rw + 1800 - 500rw + NX 
=> 2500 + 2000rw = 2800 - 1000rw + NX 
=> NX = -350

Hence, the foreign country has net exports of -350 (i.e. imports are greater than exports). The answer is C.

A Large Open Economy Has Desired National Saving of Sd