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

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)

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

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

 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

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

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

 Tariffs Tariffs on US products may reduce our exports and depress our economy, causing us to possibly retaliate & worsen the situation. US imposed trade barriers to reduce domestic unemployment during the Great Depression, many countries retaliated and unemployment increased

 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