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Analyzing GDP Equilibrium and Trade Balance Changes in Economic Models

This document presents a detailed analysis of GDP equilibrium calculations, current account balance, and the impact of investment changes on imports. The initial equilibrium GDP (Y0) is computed through the income-expenditure model, and the balance of trade is calculated based on this equilibrium. Subsequent calculations explore the effects of a decrease in exogenous investment on imports. Additionally, the necessary government spending adjustments required to reach full employment GDP are assessed, providing a comprehensive view of macroeconomic dynamics.

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Analyzing GDP Equilibrium and Trade Balance Changes in Economic Models

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  1. Let: Y  C + I + G + (X - M) C = 75 + .8YDI = 110G = 180X = 40M = 15 + .04YT = -250 + .2Y Problem 1) Compute the value of equilibrium of GDP (Y0)--illustrate with an income expenditure diagram. 2) Calculate the balance of trade on current account when income assumes the value you computed in (1) above. 3) Calculate the change in imports (M) resulting from a $20 decrease in exogenous investment (I).4) Suppose potential GDP (Yf ) is equal to $1,575. Assuming the economy is in equilibrium at the value of income you computed in (1) above, calculate the change in government spending required to achieve a full employment equilibrium.

  2. 1. To solve for equilibrium national income (Y0) First, solve for A: A = Ca - cTa + Ia + GA + (Xa - Ma)A = 75 - [(.8)(-250)] + 110 + 180 + (40 - 15) = 590 Thus, we have:

  3. The graph AE AE = Y AE 590 450 0 1,475 Y

  4. 2.To calculate the current account balance (BPCA): BPCA = X - M = 40 - {15 + [(.04)(1475)]} = -34 3. To calculate the change in imports (M) resulting from a $20 decrease in exogenous investment: M = m Y = .04 Y Thus, M = (.04)(-50) =-2

  5. 4. AE AE’ AE = Y AE 100 = Ga  2.5 Ga = 40 630 Y0 590 450 0 1,575 1, 475 Y

  6. Deterioration of consumer confidence, ceteris paribus A Interest rate LM 1 2 IS IS’ 0 National income (Y)

  7. Increase in the money supply, ceteris paribus B Interest rate LM LM’ 1 2 IS 0 National income (Y)

  8. Upward revision of Qi’s to be capturedby spending for tangible capital goods, cteris paribus C Interest rate LM 2 1 IS’ IS 0 National income (Y)

  9. Increase in the asset demand for money at every interest rate, ceteris paribus. D Interest rate LM’ LM 2 1 IS 0 National income (Y)

  10. Decrease in government spending, ceteris paribus G Interest rate LM 1 2 IS IS’ 0 National income (Y)

  11. Increase in the supply price of capital goods, ceteris paribus. H Interest rate LM 1 2 IS IS’ 0 National income (Y)

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