Download International Trade and Equilibrium Output

International Trade and
Equilibrium Output
Net Exports and
Aggregate Expenditures
• Like consumption and gross investment, net
exports also add to GDP or total output.
• Exports create Canadian jobs and income.
• For a closed economy, AE = C + Ig
• For an open economy, AE = C + Ig + Xn
The Determinants of Net Exports
• If the GDP of our trading partners is rising, we
should export more goods.
• If our GDP is rising, we should demand more
imports as well.
• If the Canadian dollar rises, we export less.
• If the Canadian dollar falls, we export more.
The Marginal Propensity to Import
(MPM)
• The percentage of any change in GDP spent on
imported goods. This is the same concept as
MPS and MPC.
• Imports are a leakage in the economy. This
means we have to remove it from the GDP
multiplier.
• Multiplier for Open Economy: 1 / MPS + MPM
Net Exports and Equilibrium GDP
• An increase in Xn raises aggregate
expenditures. This increases equilibrium GDP.
We need to make more goods to satisfy
international demand.
• A decrease in Xn decreases aggregate
expenditures. This decreases equilibrium GDP.
We need to make less goods because we are
importing foreign goods.
Foreign Policies can Affect our GDP
Prosperity
Abroad
Tariffs
Exchange
Rates
Adding the Public Sector
• C + Ig + Xn will be lower than C + Ig + Xn + G
• Therefore, adding government spending (G),
increases Aggregate Expenditures, and this
Equilibrium GDP.
• Taxes cause Disposable Income (DI) to fall by
he amount of the tax. The MPC tells us what
fraction will come from C, and the MPS tells us
how much will come from S.
Taxes and Disposable Income
• Taxes cause disposable income to drop by the
amount of the tax.
• If DI is $100, and MPC is 0.75, a $10 tax would
cause:
DI to drop from $100 to $90,
C to drop by $7.50
S to drop by $2.50
• A tax partially reduces both savings and
consumption.
MPM and Taxes
• Since part of our consumption is used to buy
imports. When a tax increases, we also must
reduce M by the Marginal Propensity to
Import.
• When M declines, Xn increases. This means
that taxes can decrease aggregate
expenditures by less than the amount of the
tax.
• Equilibrium GDP = C + Ig + Xn + G
Quick Government Review
• Government Spending increases AE and shifts
the curve upwards, raising equilibrium GDP by
the increase in spending * multiplier.
• Taxes reduce DI, reducing AE and shifting it
downward. Consumption, Savings, and
Imports are lowered by the ratio of their
propensities.
Review for the Test
• Key Questions 17, 20, and 23.
• Tomorrow we will begin completing some of the
difficult questions for this chapter as a group.
Please review them and be prepared to discuss
them aloud.
• An Assignment will be distributed Friday, to be
completed by Monday, no exceptions. Ask if there
will be an issue.
• The test for this unit will be after the completion
of Chapter 9.