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An economy is characterised by the following equation
Consumption C = 60 + 0.9Yd
Investment I = 10
Government expenditure G = 10
Tax T = 0
Exports X = 20
Imports M = 10 + 0.05Y
What is the equilibrium income? Calculate trade balance and foreign trademultiplier.?
Consumption C = 60 + 0.9Yd
Investment I = 10
Government expenditure G = 10
Tax T = 0
Exports X = 20
Imports M = 10 + 0.05Y
What is the equilibrium income? Calculate trade balance and foreign trademultiplier.?
Most Upvoted Answer
An economy is characterised by the following equationConsumption C = 6...
Equilibrium Income Calculation
To find the equilibrium income (Y), we use the aggregate demand (AD) equation, which is the sum of consumption (C), investment (I), government expenditure (G), and net exports (NX).
1. **Consumption (C)**:
- C = 60 + 0.9Yd
- Assuming Yd (disposable income) = Y - T, with T = 0, hence Yd = Y.
- C = 60 + 0.9Y
2. **Investment (I)**:
- I = 10
3. **Government Expenditure (G)**:
- G = 10
4. **Net Exports (NX)**:
- NX = Exports (X) - Imports (M)
- X = 20
- M = 10 + 0.05Y
- NX = 20 - (10 + 0.05Y) = 10 - 0.05Y
5. **Aggregate Demand (AD)**:
- AD = C + I + G + NX
- AD = (60 + 0.9Y) + 10 + 10 + (10 - 0.05Y)
- AD = 90 + 0.85Y
Setting AD equal to Y for equilibrium:
- Y = 90 + 0.85Y
- 0.15Y = 90
- Y = 600
Trade Balance Calculation
1. **Net Exports at Equilibrium**:
- Substitute Y = 600 into NX:
- M = 10 + 0.05(600) = 10 + 30 = 40
- NX = 20 - 40 = -20
Foreign Trade Multiplier
1. **Multiplier Formula**:
- The foreign trade multiplier (k) can be calculated as:
- k = 1 / (1 - MPC + MPM)
- Where MPC (Marginal Propensity to Consume) = 0.9 and MPM (Marginal Propensity to Import) = 0.05.
- k = 1 / (1 - 0.9 + 0.05) = 1 / 0.15 = 6.67
Summary
- **Equilibrium Income (Y)**: 600
- **Trade Balance (NX)**: -20 (Deficit)
- **Foreign Trade Multiplier (k)**: 6.67
To find the equilibrium income (Y), we use the aggregate demand (AD) equation, which is the sum of consumption (C), investment (I), government expenditure (G), and net exports (NX).
1. **Consumption (C)**:
- C = 60 + 0.9Yd
- Assuming Yd (disposable income) = Y - T, with T = 0, hence Yd = Y.
- C = 60 + 0.9Y
2. **Investment (I)**:
- I = 10
3. **Government Expenditure (G)**:
- G = 10
4. **Net Exports (NX)**:
- NX = Exports (X) - Imports (M)
- X = 20
- M = 10 + 0.05Y
- NX = 20 - (10 + 0.05Y) = 10 - 0.05Y
5. **Aggregate Demand (AD)**:
- AD = C + I + G + NX
- AD = (60 + 0.9Y) + 10 + 10 + (10 - 0.05Y)
- AD = 90 + 0.85Y
Setting AD equal to Y for equilibrium:
- Y = 90 + 0.85Y
- 0.15Y = 90
- Y = 600
Trade Balance Calculation
1. **Net Exports at Equilibrium**:
- Substitute Y = 600 into NX:
- M = 10 + 0.05(600) = 10 + 30 = 40
- NX = 20 - 40 = -20
Foreign Trade Multiplier
1. **Multiplier Formula**:
- The foreign trade multiplier (k) can be calculated as:
- k = 1 / (1 - MPC + MPM)
- Where MPC (Marginal Propensity to Consume) = 0.9 and MPM (Marginal Propensity to Import) = 0.05.
- k = 1 / (1 - 0.9 + 0.05) = 1 / 0.15 = 6.67
Summary
- **Equilibrium Income (Y)**: 600
- **Trade Balance (NX)**: -20 (Deficit)
- **Foreign Trade Multiplier (k)**: 6.67
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