Suppose the government collected $3.2 trillion in tax revenues and spent $3.8 trillion, and discretionary spending was $1.5 trillion. For the government to fully balance the budget this year, how much discretionary spending needs to be cut?

1) Y= C + I + G + NX

2) (a) current consumption and government purchases; (b) Y - C - G

3) S = I + NX = I + NCO

Explanation:

1) Y= C + I + G + (X - M) (1)

Since N  - M = NX, we can substitute it into equation as follows:

Y= C + I + G + NX

NX is positive because it assumed that exports of a country is greater than its imports. Therefore, NX refers to a portion of GDP that foreign demand consumed. In order words, NX is the portion of GDP that domestic demand did not consume.

2) Also, national saving is the income of the nation that is left after paying for current consumption and government purchases. Therefore, national saving (S) equals Y - C - G.

3) This is equivalent to S = I + NX = I + NCO since net exports must equal net capital outflow (NCO, also known as net foreign investment).

The implication is that there is an international linkage among saving, investment, and international capital. A nation records a positive net capital outflow when its saving is greater than its domestic investment. This indicates that the country purchasing assets in the foreign countries by using part of its saving. A nation records a negative net capital outflow when its saving is less than its domestic investment. This implies that part of the domestic investment are being financed by foreigners through the purchase of domestic assets.