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Chapter 17
LIPSEY & CHRYSTAL
ECONOMICS 12e
Learning Outcomes
Net Exports
• Since desired imports increase as national income
increases, desired net exports decrease as national
income [GDP] increases, other things being equal.
• Hence the net export function is negatively sloped [net
exports fall as GDP rises].
GDP IN OPEN ECONOMY WITH GOVERNMENT
Equilibrium GDP
• GDP is in equilibrium when desired aggregate
expenditure, C + I + G [X - IM], equals national output.
• The sum of investment and net exports is called national
asset formation because investment is the increase in
the domestic capital stock and net exports result in
investment in foreign assets.
• At the equilibrium level of GDP, desired national saving,
S + T - G, is equal to national asset formation, I + X - IM.
GDP IN OPEN ECONOMY WITH GOVERNMENT
T-G
-170
IM = 0.25Y
540
X = 540
540
2160
0
(X - IM) = 540 - 0.25Y
AE = Y
AE
E0
2000
1060
450
0 1000 2000 3000 4000 5000
Real National Income [GDP] [£m]
Aggregate expenditure
AE = Y AE1
Desired Expenditure [£m]
AE0
45o
0 Y0 Y0 Real National Income [GDP] [£m]
The Effect of Change in Government Spending