Module: Macroeconomics Academic year 2023/2024

Level: 1st preparatory year

CHAPTER5: Keynesian multipliers in an open economy

1- Equilibrium income in an open economy

We have :

C = cYd + C0
I0,
G0
T= tY + T0
Tr = rY + Tr0
X0
M = mY + M0 with M0 (autonomous imports) et m marginal propensity to import

We have :

 Y= (cYd + C0) +I0 + G0+ X0-M

 Y= cY - cT + c Tr + C0 + I0 + G0+ X0 –my – M0
 Y= cY – c T0 - ctY+ c Tr0 + crY + C0 + I0 + G0 + X0 –my – M0
 Y – cY + ctY- crY + mY= c Tr0 – c T0 + C0 + I0 + G0 + X0– M0
 Y( 1-c+ct-cr+m) = c Tr0 – c T0 + C0 + I0 + G0 + X0– M0
 Y( 1-c(1-t+r)+m) = c Tr0 – c T0 + C0 + I0 + G0 + X0– M0
𝟏
 Ye= (c Tr0 – c T0 + C0 + I0+G0+X0–M0) equilibrium income
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2- Multipliers in an open economy (4 economic agents: households, firms, public

administration and the rest of the world)

2-1- C0 multiplier
𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

1
 𝟏
∆Y= x ∆C0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y/∆C0= is the multiplier for autonomous consumption.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2-2- I0 multiplier
𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= x ∆I0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y/∆I0= is the multiplier for autonomous investment.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2-3- G0 multiplier

𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

𝟏
∆Y= x ∆G0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y/∆G0= is the multiplier for autonomous public spending.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2-4- X0 Multiplier
𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= x ∆X0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y/∆X0= is the multiplier for autonomous exports.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

Note: We can say that investment I0, consumption C0 and public spending G0 have the
same impact on Y (with the same multiplier).

𝟏
∆Y / ∆C0 = ∆Y / ∆I0 = ∆Y / ∆G0= ∆Y / ∆X0 = K =
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2
2-5- M0 multiplier
𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
−𝟏
∆Y= x ∆M0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
−𝟏
∆Y/∆M0= = -K is the multiplier for autonomous imports.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2-5- Tr0 multiplier

𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝒄
∆Y= x ∆Tr0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝒄
∆Y/∆Tr0= = cK is the multiplier for autonomous transfers.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

2-5- T0 multiplier
𝟏
Y= (c Tr0 – c T0 + C0 + I0+G0+X0–M0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
𝟏
∆Y= (Δ C0 + ΔI0 + ΔG0 +ΔX0 -ΔM0 +c (ΔTr0– ΔT0)
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
−𝒄
∆Y= x ∆T0
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚
−𝒄
∆Y/∆T0= = -cK is the multiplier for autonomous taxes.
𝟏−𝒄(𝟏−𝑡+𝑟)+𝑚

3- Haavelmo's Theorem (Balanced Budget Multiplier)

The balanced budget multiplier is primarily used when the observed gap is a deflationary
gap. This theorem teaches us that in a Keynesian world, a similar increase in public spending
and taxes results in an increase in national income by an amount equal to the additional
spending. The reason for this result is that the multiplier effect of public spending outweighs
the multiplier effect of the inverse direction of taxes. The budget balance before modifying
the equilibrium point was BB1 = T0 - G0. With a simultaneous change in G and T with the
same value and in the same direction, the new budget balance remains the same:

BB2 = T’0 – G’0 = (T0 + ΔT0) - (G0 + Δ G0) = T0 – G0 (because Δ T0 = ΔG0)

ΔY1 = K ΔG0

3
ΔY2 = - cK ΔT0
The global effect is ΔY = Δ Y1 + Δ Y2 = K ΔG0 - cK ΔT0
We have Δ T0 = ΔG0 so :
ΔY = Δ Y1 + Δ Y2 = K ΔG0 - cK ΔT0 = K ΔG0 - cK ΔG0
ΔY = (1- c)K ΔG0
1
We know that K =
1−𝑐
1
ΔY = (1- c)x 1−𝑐 ΔG0

ΔY = ΔG0 = Δ T0