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International Trade and Equilibrium Output

International Trade and Equilibrium Output. Chapter 10 continued. GDPs. Equilibrium GDP for a closed economy= GDP = C + Ig Equilibrium GDP for an open economy without gov’t involvement = GDP = C + Ig + Xn Equilibrium GDP for an open economy with gov’t involvement = GDP = C + Ig + G + Xn.

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International Trade and Equilibrium Output

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  1. International Trade and Equilibrium Output Chapter 10 continued

  2. GDPs • Equilibrium GDP for a closed economy= • GDP = C + Ig • Equilibrium GDP for an open economy without gov’t involvement = • GDP = C + Ig + Xn • Equilibrium GDP for an open economy with gov’t involvement = • GDP = C + Ig + G + Xn

  3. 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)

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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 full-employment, 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

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