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The country of Bienmundo does not trade with any other country. Its GDP is $30 billion. Its government purchases $5 billion worth of goods and services each year, collects $7 billion in taxes, and provides $3 billion in transfer payments to households. Private saving in Bienmundo amounts to $5 billion. What are consumption and investment in Bienmundo?
a. $18 billion and $5 billion, respectively
b. $21 billion and $4 billion, respectively
c. $13 billion and $7 billion, respectively
d. There is not enough information to answer the question.

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Answer:

The answer is: B) $21 billion and $4 billion, respectively

Explanation:

The formula for calculating gross domestic product (GDP) is:

GDP = C + I + G + (X - M) = $30 billions

where:

  • C =  private consumption
  • I = investment = $5 billions (private savings) - $1 billion (government deficit = $7 billions in taxes - $5 billions spent - $3 billions transferred) = $4 billions
  • G = Government expenses = $5 billions
  • X = exports = 0
  • M = imports = 0

GDP = C + I + G + (X - M)

$30 billions = C + $4 billions + $5 billions + $0

C = $30 billions - $4 billions - $5 billions = $21 billions

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