Download International Trade and Equilibrium Output

International Trade and
Equilibrium Output
Chapter 10 continued
GDPs

Equilibrium GDP for a closed economy=


Equilibrium GDP for an open economy
without gov’t involvement =


GDP = C + Ig
GDP = C + Ig + Xn
Equilibrium GDP for an open economy
with gov’t involvement =

GDP = C + Ig + G + Xn
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

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)

Other things equal, positive net
exports increase aggregate
expenditures and GDP beyond what
they would be in a closed economy

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 text)

All things equal, negative net
exports reduce aggregate
expenditures and GDP below what
they would be in a closed economy
See graph on page 188

Supports the generalizations
Government Spending


An increase in gov’t spending
boosts aggregate expenditure
See the table on page 190 and
graph on page 191


Gov’t spending is 20 billion at every
level
The new equilibrium is 550

GDP = C (510) + Ig (20) + Xn (0) + G
(20)

Remember that GDP was 470 when it was
only C + Ig

The sum of leakages (savings,
imports and taxes) = sum of
injections (investment, exports and
G purchases) at the equilibrium
GDP
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


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 fullemployment, 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
HOMEWORK!! Due Tomorrow





Page 201
Number 4
Number 5
Number 6 (read the tax section on
your own)
Number 7 (use figures 10-5 and
10-6 for help)
Number 4

Suppose that Zumo has an MPC of .9
and real GDP of $400 billion. If
investment spending falls by $4 billion,
what will be its new level of real GDP?

The multiplier is 10 or 1/(1-.9) so 10 X-$4
billion = -$40 billion. The new GDP is
$400 billion - $40 billion = $360 billion
Number 5


QA. Use columns 1 and 2 to
determine the equilibrium GDP for
this hypothetical economy
A. Equilibrium GDP for closed
economy is $400 billion (GDP = C +
Ig)


QB.
The economy is now open for international trade
by including the export and import figures of columns 3
and 4. Calculate net exports
B. Net export data for column 5 is $-10
in each case (X – M). Aggregate
expenditure data for column 6 (top to
bottom) – subtract Xn from C + Ig

230
270 310 350 390 430 470 510

Determine the equilibrium GDP for the open economy.

Equilibrium GDP is $350b



GDP = C + Ig + Xn
 GDP = 360 + -10
Explain why equilibrium GDP differs from the closed economy.
$50b below the $400b equilibrium for the
closed economy. The $-10 billion of net exports
is a leakage which reduces equilibrium GDP by
$50 billion


QC. Given the original $20b level of
exports, what would be the equilibrium
GDP if imports were $10b greater at
each level of GDP
C. Imports = $40 billion (30 +10)

the new equilibrium GDP would be $300
billion. (GDP = C + Ig +Xn)


GDP = 320 + -20
GDP = $300 billion


QC Or at a billion less at each level of GDP
Imports = $20 billion (30 – 10): the new
equilibrium GDP would be 400 billion.

(GDP = C + Ig +Xn)




GDP = 400 + 0
GDP = $400 billion
The generalization
Increases in imports reduce GDP, decreases
in imports increases GDP


QD. What is the multiplier in these
examples?
D. Since every rise of $50 billion in
GDP increases aggregate expenditure
by $40 billion, the MPC is .8 and so the
multiplier is 5.
Number 6




QA. Graph this consumption schedule and not the
size of the MPC.
A. The size of the MPC is 80/100or .8 because
consumption changes by 80 when GDP changes
by 100.
QB
A. The resulting C schedule will be exactly $10B
below the original at all levels of GDP because
people now have to pay $10B in tax out of each
level of income. The multiplier should be 5
because the MPS is .2 and 1/.2 is 5.

Equilibrium decreases
CLASSWORK—10 minutes


Read Equilibrium Vs Full-employment GDP on
pages 194-195.
Select one of the following:




The Great Depression in the US (p. 196)
Vietnam War (p. 197)
The End of the Japanese Growth “Miracle” (p. 197)
Take Notes (at least 3) on how the ideas of
recessionary or inflationary gaps apply to the
event