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Macro Lecture 9

The document discusses the concept of an open economy, highlighting its characteristics and components, such as consumption, investment, government purchases, and net exports. It explains equilibrium output through two approaches: the aggregate approach and the withdrawals-injections approach, providing relevant equations for income equilibrium and the open economy multiplier. Additionally, it includes examples to illustrate how to determine equilibrium income, consumption, saving, imports, and trade balance in various economic scenarios.

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7 views3 pages

Macro Lecture 9

The document discusses the concept of an open economy, highlighting its characteristics and components, such as consumption, investment, government purchases, and net exports. It explains equilibrium output through two approaches: the aggregate approach and the withdrawals-injections approach, providing relevant equations for income equilibrium and the open economy multiplier. Additionally, it includes examples to illustrate how to determine equilibrium income, consumption, saving, imports, and trade balance in various economic scenarios.

Uploaded by

homyyza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Macroeconomics Dr/ Zeyad Albukhaiti

Lecture 9

Equilibrium output in open economy

 The open economy

An open economy is a type of economy where not only domestic factors but also entities
in other countries engage in trade of products. Trade can take the form of managerial
exchange, technology transfers, and all kinds of goods and services.
The components of open economy are the national income of an open economy includes
consumption, investments, government purchase and net exports.
The open economy refers to a country with a free flow of goods, services, and capital in
and out of the country. An open economy allows foreign investors to own domestic
companies and allows citizens to invest their money in foreign countries. Open economies
are also known as free economies.
 The Equilibrium output in open economy

1st Approach: Aggregate Approach:


Equilibrium occurs when aggregate output planned is equal to planned aggregate
expenditure in open economy.

Output(supply) = aggregate expenditure (demand)


Y = AE

C+S+T+M C+I+G+NX

2nd Approach: withdrawals- Injections Approach:

S+T+M = = I+G+X
Withdrawals(leakages) = Injections
Macroeconomics Dr/ Zeyad Albukhaiti
Lecture 9

 The Economic model of open economy consists of the following equations:


1 Income equilibrium equation Y = C+I+G+NX
2 Consumption equation C = α + bYd
3 Disposable income equation Yd = Y - T
4 Fixed Taxes T=T0
5 Government Expenditure G=G0
6 Autonomous Investment I=I0
7 Autonomous Exports equation X=X0
8 Imports equation M= m0 + m1y

So:
We can extract the (equilibrium income in open economy equation) as follow:
𝟏
Y* = [α – bT0 + I + G + x - m0 ]
𝟏−𝐛+𝐦𝟏

Thus, the open economy multiplier will be as:


𝟏
Multiplier =
𝟏−𝐛+𝐦𝟏

 Example (1)
Suppose you are given the following model:

C = 100 + 0.75 Yd , I = 200 , G= 100 , X= 100 , T= 100

M= 25 + 0.15Y

1. Determine What is the equilibrium level of income? (by using the different
approaches).
2. Calculate the consumption & saving & imports at equilibrium.
3. Determine the net exports.
4. Calculate the multiplier of equilibrium income. And what it means?
Macroeconomics Dr/ Zeyad Albukhaiti
Lecture 9

 Example (1)
Assume an economy with the following model (billion):

C = 150 + 0.8 Yd , I = 250 , G= 100 , X= 200 , T= 100


M= 100 + 0.15Y

1) Determine the equilibrium level of income?


2) Calculate the consumption & saving & imports at equilibrium.
3) Calculate the multiplier of equilibrium income.
4) Determine the Surplus or Deficit in trade balance.
5) Suppose the exports increase from 200 billion to 300 billion. Calculate the
Surplus or Deficit in trade balance.

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