Net Exports and Aggregate Expenditures Exports (X) create domestic production, income and employment Imports (M) represent goods and services produced

Net Exports and Aggregate Expenditures

Exports (X) create domestic production, income and employment

Imports (M) represent goods and services produced abroad

In an open economy, aggregate spending is C+ Ig + Xn, where Xn = (X - M) Xn can be either positive or negative

©2013 McGraw-Hill Ryerson Ltd. 1Chapter 9.3

If GDP in other countries is growing, demand for our exports will increase

Our imports are dependent on our own GDP

Both imports and exports are affected by the exchange rate depreciation appreciation

2©2013 McGraw-Hill Ryerson Ltd. Chapter 9.3

(1)Domestic

output(GDP = DI)(billions)

(2)Exports

(X)(billions)

(3)Imports

(M) (billions)

(4)Net Exports,

Xn (2)- (3)

(billions)

(5)Marginal

propensity to import(MPM)

Δ(3)/Δ(1)

$370 $40 $15 $+25

390 40 20 +20 (20-15)/(390-370) = 0.25

410 40 25 +15 0.25

430 40 30 +10 0.25

450 40 35 +5 0.25

470 40 40 0 0.25

490 40 45 -5 0.25

510 40 50 -10 0.25

530 40 55 -15 0.25

550 40 60 -20 0.25©2013 McGraw-Hill Ryerson Ltd. 3Chapter 9.3

Marginal Propensity to Import (MPM) MPM = ΔM (import) / ΔGDP MPM is the slope of net export schedule

Open Economy Multiplier The closed economy the multiplier is

1/MPS Expenditure on imports is a leakage Open economy multiplier = 1/ (MPS +

MPM)



(1)Domestic

Output (and Income)

(GDP = DI),(billions)

(2)Aggregate

Expenditure for private economy

(no G)(C+Ig),

(billions)

(3)Exports

(X)(billions)

(4)Imports

(M) (billions)

(5)Net

Exports, Xn

(3)- (4) (billions)

(6)Aggregate

Expenditure for open economy

(no G)(C+Ig+Xn),(billions)

$370 $395 $40 $15 $+25 $420

390 410 40 20 +20 430

410 425 40 25 +15 440

430 440 40 30 +10 450

450 455 40 35 +5 460

470 470 40 40 0 470

490 485 40 45 -5 480

510 500 40 50 -10 490

530 515 40 55 -15 500

550 530 40 60 -20 510

Aggregate expenditureswith positivenet exports

(C + Ig+Xn)0

Aggregate expenditureswith negative netexports

(C + Ig+Xn)2

(C + Ig+Xn)1

Xn1

Xn2

Positive net exports

Negative net exports450 470 490

LO4 11-6©2013 McGraw-Hill Ryerson Ltd. 6Chapter 9.3

A decline in net exports decreases aggregate expenditures and reduces GDP

A rise in net exports increases aggregate expenditures and increases GDP


Prosperity AbroadTariffsExchange Rates


Source: World Trade Organization, WTO Publications, www.wto.org.


Documents

Net Exports and Aggregate Expenditures Exports (X) create domestic production, income and employment Imports (M) represent goods and services produced