International trade and equilibrium output
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International Trade and Equilibrium Output. Chapter 10 continued. GDPs. Equilibrium GDP for a closed economy= GDP = C + Ig Equilibrium GDP for an open economy without gov’t involvement = GDP = C + Ig + Xn Equilibrium GDP for an open economy with gov’t involvement = GDP = C + Ig + G + Xn.

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International Trade and Equilibrium Output

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International trade and equilibrium output

International Trade and Equilibrium Output

Chapter 10 continued


International trade and equilibrium output

GDPs

  • Equilibrium GDP for a closed economy=

    • GDP = C + Ig

  • Equilibrium GDP for an open economy without gov’t involvement =

    • GDP = C + Ig + Xn

  • Equilibrium GDP for an open economy with gov’t involvement =

    • GDP = C + Ig + G + Xn


Net exports

Net Exports

  • Export – imports

  • Exports expand aggregate expenditure

    • Exports (X) create domestic production, income & employment due to foreign spending on US produced g & s

  • Imports contract aggregate expenditure

    • Imports (M) reduce the sum of C & Ig expenditures by the amount expended on imported goods (so this amount must be subtracted so that spending on US produced goods is not overstated)


Net exports equilibrium gdp

Net Exports & Equilibrium GDP

  • POSITIVE NET EXPORTS

    • Multiplier effect

    • A positive Xn leads to a positive change in equilibrium GDP

    • See table 9.4 on page 173

      • Suppose Xn is +5 billion for each level

      • GDP equilibrium = C + Ig + Xn

      • Where is the new equilibrium GDP?

        • 490

      • A 5b increase in Xn = 20b in GDP—what is the multiplier?

        • 4


Generalization page 187 in text

Generalization (page 187 in text)

  • Other things equal, positive net exports increase aggregate expenditures and GDP beyond what they would be in a closed economy


International trade and equilibrium output

  • NEGATIVE NET EXPORTS

    • Multiplier effect

    • A negative Xn leads to a negative change in equilibrium GDP

    • See table 9.4 on page 173

      • Suppose Xn is -5 billion for each level

      • GDP equilibrium = C + Ig + Xn

      • Where is the new equilibrium GDP?

        • 450

      • A 5b decrease in Xn = 20b decrease in GDP—what is the multiplier?

        • 4


Generalization page 187 in text1

Generalization (page 187 in text)

  • All things equal, negative net exports reduce aggregate expenditures and GDP below what they would be in a closed economy


International economic linkages

International Economic Linkages

  • Prosperity Abroad

    • Higher incomes of trading partners allows the US to sell more goods, raising the Xn and increasing GDP

    • Recession abroad causes the reverse effect


International trade and equilibrium output

  • Exchange Rates

  • Depreciation of the dollar lowers the cost of American goods to foreigners and encourages exports from the US while discouraging the purchases of imports in the US

    • If economy is operating below full-employment, a rise in Xn will increase expenditure and expand GDP

    • If economy is at full-employment, an increase in Xn & expenditure will cause demand-pull inflation


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