International Trade and Equilibrium Output

Net Exports and Aggregate Expenditures

• Like consumption and gross investment, net exports also add to GDP or total output.

• Exports create Canadian jobs and income.• For a closed economy, AE = C + Ig• For an open economy, AE = C + Ig + Xn

The Determinants of Net Exports

• If the GDP of our trading partners is rising, we should export more goods.

• If our GDP is rising, we should demand more imports as well.

• If the Canadian dollar rises, we export less.• If the Canadian dollar falls, we export more.

The Marginal Propensity to Import (MPM)

• The percentage of any change in GDP spent on imported goods. This is the same concept as MPS and MPC.

• Imports are a leakage in the economy. This means we have to remove it from the GDP multiplier.

• Multiplier for Open Economy: 1 / MPS + MPM

Net Exports and Equilibrium GDP

• An increase in Xn raises aggregate expenditures. This increases equilibrium GDP. We need to make more goods to satisfy international demand.

• A decrease in Xn decreases aggregate expenditures. This decreases equilibrium GDP. We need to make less goods because we are importing foreign goods.

Foreign Policies can Affect our GDP

Prosperity Abroad Tariffs

Exchange Rates

Adding the Public Sector

• C + Ig + Xn will be lower than C + Ig + Xn + G• Therefore, adding government spending (G),

increases Aggregate Expenditures, and this Equilibrium GDP.

• Taxes cause Disposable Income (DI) to fall by he amount of the tax. The MPC tells us what fraction will come from C, and the MPS tells us how much will come from S.

Taxes and Disposable Income

• Taxes cause disposable income to drop by the amount of the tax.

• If DI is $100, and MPC is 0.75, a $10 tax would cause:

DI to drop from $100 to $90, C to drop by $7.50S to drop by $2.50• A tax partially reduces both savings and

consumption.

MPM and Taxes

• Since part of our consumption is used to buy imports. When a tax increases, we also must reduce M by the Marginal Propensity to Import.

• When M declines, Xn increases. This means that taxes can decrease aggregate expenditures by less than the amount of the tax.

• Equilibrium GDP = C + Ig + Xn + G

Quick Government Review

• Government Spending increases AE and shifts the curve upwards, raising equilibrium GDP by the increase in spending * multiplier.

• Taxes reduce DI, reducing AE and shifting it downward. Consumption, Savings, and Imports are lowered by the ratio of their propensities.

Review for the Test

• Key Questions 17, 20, and 23.• Tomorrow we will begin completing some of the

difficult questions for this chapter as a group. Please review them and be prepared to discuss them aloud.

• An Assignment will be distributed Friday, to be completed by Monday, no exceptions. Ask if there will be an issue.

• The test for this unit will be after the completion of Chapter 9.