National Income Accounting for an Open Economy 口 Consumption The portion of gnp purchased by the private sector to fulfill current wants Inyestment The part of output used by private firms to produce future output Government Purchases Any goods and services purchased by federal state, or local governments
11 National Income Accounting for an Open Economy ◼ Consumption – The portion of GNP purchased by the private sector to fulfill current wants ◼ Investment – The part of output used by private firms to produce future output ◼ Government Purchases – Any goods and services purchased by federal, state, or local governments
National Income Accounting for an Open Economy The National Income Identity for an Open Economy It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production Y=C+I+G+EX-IM (12-1) D YIS GNP >)C is consumption is investment ))G Is government purchases 》 EX is exports IM is imports In a closed economy, EX==0
12 ◼ The National Income Identity for an Open Economy – It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production: Y = C + I + G + EX – IM (12-1) where: » Y is GNP » C is consumption » I is investment » G is government purchases » EX is exports » IM is imports – In a closed economy, EX = IM = 0. National Income Accounting for an Open Economy
National Income Accounting for an Open Economy a An Imaginary Open Economy Assumptions of the model > There is an economy, Agraria, that can only produce wheat >> Each citizen of Agraria is both a consumer and a farmer of wheat > The Agrarian government appropriates part of the crop to feed its army > Agraria can import milk from the rest of the world in exchange for exports of wheat The price of milk is 0.5 bushel of wheat per gallon and at this price Agrarians want to consume 40 gallons of milk
13 ◼ An Imaginary Open Economy – Assumptions of the model: »There is an economy, Agraria, that can only produce wheat. »Each citizen of Agraria is both a consumer and a farmer of wheat. »The Agrarian government appropriates part of the crop to feed its army. »Agraria can import milk from the rest of the world in exchange for exports of wheat. ◼ The price of milk is 0.5 bushel of wheat per gallon, and at this price Agrarians want to consume 40 gallons of milk. National Income Accounting for an Open Economy
National Income Accounting for an Open Economy GNP Government Consumption Investment Exports - Imports (total output) purchases 100 752 10 +10 20b 55 bushels of wheat +(0.5 bushel per gallon)X(40 gallons of milk) 0.5 bushel per gallon x 40 gallons of milk
14 Table 12-1: National Income Accounts for Agraria, an Open Economy (bushels of wheat) National Income Accounting for an Open Economy