An Algebraic Model of the Goods Market in an Open Economy

Exogenous Variables G, T, r, Y*, =1

Model

Endogenous Variables C, I, Y, X, IM, NX

IM = im1Y

Variable Definitions Y C I X IM G T Y* r = = = = = = = = = domestic output domestic consumption spending domestic investment spending exports imports domestic government spending domestic net taxes foreign output domestic real interest rate Parameter Definitions c0 c1 d0 d1 d2 x1 = = = = = = autonomous consumption propensity to consume autonomous investment propensity to invest sensitivity of investment to the real interest rate foreigners propensity to buy our exports propensity to import

im1 =

Demand for Domestic Goods (ZZ)

ZZ = C + I + G + NX
ZZ = [c 0 + c1 (Y T )] + [ d0 + d1Y d2 r ] + G + [ x1Y * im1Y ]

ZZ = [c 0 + d0 + G c1T d2 r + x1Y *] + (c1 + d1 im1 )Y Equilibrium Output (YE)

YE = ZZ (YE )
YE = [c 0 + d0 + G c1T d2 r + x1Y *] + (c1 + d1 im1 )YE

YE =

1 [c 0 + d0 + G c1T d2 r + x1Y *] 1 (c1 + d1 im1 )

UCSD Economics 110B

An Algebraic Model of the Goods Market in an Open Economy

Comparative Statics I: How do changes in exogenous variables affect YE? (Assume that 0 < (c1 + d1 im1 ) < 1) An increase in G results in an increase in YE:

An increase in T results in a decrease in YE:

YE 1 = >0 G 1 (c1 + d1 im1 )

YE c1 = <0 T 1 (c1 + d1 im1 ) YE x1 = >0 Y * 1 (c1 + d1 im1 )

An increase in Y* results in an increase in YE:

Comparative Statics II: How do changes in exogenous variables affect NXE? (Assume that ) Note that: An increase in G results in a decrease in NXE :

Y NX E = im1 E < 0 G G Y NX E = im1 E > 0 T T Y NX E = x1 im1 E > 0 Y * Y *

An increase in T results in an increase in NXE :

An increase in Y* results in an increase in NXE :

UCSD Economics 110B