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
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