Question

In: Economics

6. “Starting from an initial position of equilibrium with X – M =0, an economy experiences...

6. “Starting from an initial position of equilibrium with X – M =0, an economy experiences income growth. If this growth is due to an autonomous increase in investment, then the balance of trade will move into a deficit, while if it is due to an exogenous increase in exports then the balance of payments will display a surplus, although the surplus will be less than the initial increase in exports.”

Solutions

Expert Solution

ans....

According to the fact that disposable income is either saved or consumed we have the Y = C + S + T.Now the aggregate spending in the economy is given by Y = C + I + G + (X - M).Thus equilibrium requires aggregate spending must be equal to income.Hence

C + S + T = C + I + G + (X - M)

Solving we get

X - M = (S - I) + (T - G).

The above identity clearly states that a trade deficit is one to one reflected in an internal deficit or an internal deficit(public G>T or private I>S) is one to one reflected via the trade deficit.

Thus when income increases through an increase in investment while savings , goverment spending and taxes remaining same this creates an internal deficit which needs to be reflected via a deficit in balance of trade.Thus the balance of trade which was intially in balance nows shows a deficit.

However if rise in income is due to a rise in autonomous exports , the balance payments will clearly depict a surplus as X - M is positive.However imports are not autonomous , rather they are always in proportion to income(M = A + mY where A is the autonomous component and m is the marginal propensity to import) .Thus higher income emplies a higher level of imports .Hence the (X - M) rises due to a hike in exports but as imports also rise due to a rise in income the surplus in balance of payments is lesser than the initial increase in autonomous exports.


Related Solutions

Suppose that, from an initial consumer equilibrium position, the price of good X rises while the...
Suppose that, from an initial consumer equilibrium position, the price of good X rises while the price of good Y remains the same. Using indifference curve analysis, explain how and why the consumer’s relative consumption of the two goods will change.
m is the order of the minima. If m < 0, its position, x, is negative....
m is the order of the minima. If m < 0, its position, x, is negative. If m > 0, its position, x, is positive. Write the positions under the minima on table Create a table for your data: a. 1st column is the order (m) from most negative to most positive b. 2nd column is the position (x) for the order (m) c. 3rd column is the wavelength (λ) for the order (m) m x (cm) 1 0.41 2...
1) Consider a small, open economy starting off with balanced trade. If the economy experiences an...
1) Consider a small, open economy starting off with balanced trade. If the economy experiences an increase in demand for economic investment, the result will be _____________ in the world real interest rate and the introduction of a trade _________. a. no change; deficit b. an increase; surplus c. no change; surplus d. a decrease; deficit 2) Consider a small, open economy that starts off in balanced trade. If its government raises taxes for fiscal policy, we expect to see...
suppose that from an initial equilibrium position in the offer curve diagram country 1 imposes a...
suppose that from an initial equilibrium position in the offer curve diagram country 1 imposes a tarrif on country 2 export good at the same time that consumers in country 2 change their tastes toward wanting more of 2's export good. illustrate and explain the impact of these 2 simultaneous events on country 1's volume and terms of trade . assume that both countries offer curves are elastic throughout
Q1. Consider an economy in the United States, starting from the long-run equilibrium denoted as the...
Q1. Consider an economy in the United States, starting from the long-run equilibrium denoted as the point A. Use an aggregate demand and aggregate supply (AD-AS) diagram to show that the economy is in the long-run equilibrium. (Please label variables clearly) a. If the U.S. currency becomes stronger (the value of a dollar increases), there is a change in international variables. How does this situation affect the AD-AS diagram? What will happen to the equilibrium price level, inflation, unemployment and...
A block attached to a spring is displaced from equilibrium to the position x=+1.3m and released....
A block attached to a spring is displaced from equilibrium to the position x=+1.3m and released. The period is 2.6s. At what positions and times during the first complete cycle do the following conditions occur. a) |v|=0.5vmax|, Where vmax is the maximum speed? First position:  m . . . First time:  s. Second position:  m . . . Second time:  s. Third position:  m . . . Third time:  s. Fourth position:  m . . . Fourth time:  s. b) |a|=0.5amax. Where amax is the maximum magnitude of...
Problem Solve m x''+ kx = 0 for m=2 kg, k=18 N/m and the following initial...
Problem Solve m x''+ kx = 0 for m=2 kg, k=18 N/m and the following initial conditions: a) x0 =1 mm, v0 = 3 mm/s b) x0 = -1 mm, v0 = 3 mm/s c) x0 =1 mm, v0 = ?3 mm/s d) x0 = ?1 mm, v0 = ?3 mm/s e) x0 = 0, v0 = ?3 mm/s f) x0 = 0, v0 = 3 mm/s g) x0 = ?1 mm, v0 = 0 h) x0 =1 mm, v0...
A batted baseball is hit with a velocity of 49.7 m/s, starting from an initial height...
A batted baseball is hit with a velocity of 49.7 m/s, starting from an initial height of 4 m. Find how high the ball travels in two cases: (a) a ball hit directly upward (b) a ball hit at an angle of 70 degrees. also find how long the ball is in the air in both cases
A batted baseball is hit with a velocity of 44 m/s, starting from an initial height...
A batted baseball is hit with a velocity of 44 m/s, starting from an initial height of 4 m. Find how high the ball travels in two cases: (a) a ball hit directly upward and (b) a ball hit at an angle of 69° with respect to the horizontal. Also, find how long the ball stays in the air in each case. case a: case b:
Two sources are placed at (0 m, 0 m) and (6 m, 0 m). Both sources...
Two sources are placed at (0 m, 0 m) and (6 m, 0 m). Both sources emit a 300 Hz sound. The point (4 m, 3 m) is on the second antinodal line. a) What is the speed of the wave in this medium? b) What type of interference is occurring at (2 m, 5m)? c) OPTIONAL: Find the point on the line x=4 that is on the first nodal line.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT