II. General equilibrium approachesâ€”theory. A. Analytical tools. Producerâ€™s problem Consumerâ€™s problem Aggregate income and expenditure Markets and trade Distortions and non-traded goods. Producerâ€™s problem. Consumerâ€™s problem. Aggregate budget constraint. Equilibrium: Walrasâ€™ law.
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(A) Base model
Y = C + I + G + (X - M)
let C + I + G = E be agg. dom. spending; so
Y - E = X - M in equilibrium. Internal balance <==> external balance
(B) With taxes and int’l capital flows
Y + R - T = C + I + G - T + (X + R - M)
let Y + R - T - C = S be agg. dom. savings; so
X + R - M = (S - I) + (T - G) in eq’m. Curr. acc. surplus is equal to excess of savings over investment plus gov’t budget surplus.