Let’s translate “Americans are foolishly saving too little” into a simple GDP story. Recall that GDP = C + I + G + Net exports. GDP is fixed and equal to 100 throughout the story:

After all, it’s pinned down by the production function of Chapter 26. Thus, the size of the pie is fixed: The only question is how the pie is sliced into C, I, G, and net exports. To keep it simple, assume that I + G = 40 throughout.

a. The “saving too little” story comes in two parts: In part one (now), the United States has high C and low (really, negative) net exports. If C = 70, what do net exports equal? Is this a trade deficit or a trade surplus?

b. In part two (later), foreign countries are tired of sending so many goods to the United States, and want to start receiving goods from the United States. Net exports now become positive, rising to +5. What does C equal? If citizens value consumption, which period do they prefer: “now” or

“later”?  lop8