Download Income Determination - University of Texas at Austin

Income Determination
International Dimension
Overview
 Keynesian Income Determination Models
 Private sector



Consumption demand
Investment Demand
Supply & demand for money
 Public



Sector
Government expenditure
Government taxes
Monetary policy manipulation of money supply
 International
 imports,
exports, net exports
International Trade
 Imports (M)
 goods
and services purchased from foreigners
 money spent here is subtracted from aggregate demand
 we often assume M = mY, or M = l + mY
(where m = marginal propensity to import)
 Exports (X)
 addition to
aggregate demand
Trade Balance - I
 Balance of Payments
 all
inflows and outflows
 transactions that bring in foreign exchange = credits
 transactions that lose foreign exchange = debits
 BofP includes
 Current
account
 Capital account
Trade Balance - II
 Current Account
 Imports
& Exports of goods and services
 Income received or paid on investments
 Trade Balance
 Exports
X
of goods and services minus imports
-M
 Trade "deficit" = M > X
 Trade “surplus” = M < X
New identity
 YC + I + G + X - M
 Y  C + I + G + (X - M) where (X - M) = net X's
 Y  C + I + G + (X - [l + mY])
Y  C + I +G + (X - M)
 Equilibrium when planned expenditures = actual
expenditures, or aggregate demand, C + I + G + (X - M) =
aggregate output (Y).
C+I + G + (X - M)
w/(X>M)
C, I, G, X, M
C+I+G
Y
Y
Y  C + I + G + (X - [l + mY])
 Suppose we assume imports rise with rising income
w/(M = M)
C, I
w/(M = l + mY)
Y
Y
Algebraic Solutions
YC+I+G
 S  I + G + (X - M)
 where S = -a + (1-b)Y
 where C = a + bY
 where I = I, or I = f + gY
 where I = I, or I = f + gY
 where G = G
 where G = G
 where M = M, or
 where M = M,
or
M = l + mY
M = l + mY
 Solve for equilibrium Y
 Solve for equilibrium Y
Problems
 What will be the effect on Y of an increase in
imports?
 What will be the effect on Y of an increase in
exports?
 What will be the effects of a trade deficit?
 What of a trade surplus?
Open Economy Multiplier - I
YC+I+G
 Ya + bY -bT + I + G + (X - [l + mY])
 Y = a/(1 - b + m) -bT/(1 - b + m) + I/(1 - b + m) +
G/(1 - b + m)+ X/(1 - b + m) - l/(1 - b + m)
 We can solve for any multiplier by taking the
derivative, in the process of which all values on
right = 0 except for for those with the variable
 e.g., dY/dG = 1/(1 - b + m) = government
expenditure multiplier
Open Economy Multiplier - II
 In dY/dG = 1/(1 - b + m) we see multiplier is
LOWERED by imports
 A given increase in G (or I, or X) will have LESS
of an impact on Y because some of the increase in
Y is spent abroad
Trade Feedback Effect
 trade feedback effect = "tendency for an increased
in the economic activity of one country to lead to a
world wide increase in economic activity"
 E.g., US Y M = X of other countries  Y
in those countries
 This  in foreign Y US X's US Y
Homework
 Suppose you followed the kind of policies used by
the American administration in 1972, cutting back
agricultural production & expanding exports,
raising exports by 10%. What would be effect on
aggregate Y? On trade balance?
--END--