Question

In the open economy equation Y=C+I+G+NX
a. Does C, as used in the above equation, include imported goods and why?
b. Does I, as used in the above equation, include exported goods and why?
c. What is NX? Why do we need this term in this equation?

Answer 1

a. C in the equation Y= C+I+G+NX means consumption of goods in open economy . But it does not include imported goods. This is because the above equation measures GDP which shows country's production. Imports are not produced in domestic countries. So under consumption of goods, imported items are not included.

b.No, I doesn't include exported goods. It only include investment in capital machinery, human capital investment, purchase of software, equipment for a factory and many more even in open economy. Exported goods are calculated in (X-M) It means exports minus imports.

C. NX means net exports. It means total exports minus total imports. It is important because it states economic situation of the country. It also represents standard of living. NX is important because it exclude imported items thus representing the actual economic situation of the country.GDP thus is an economic indicator, showing the progress of the country if exports are more than imports in the context of NX.