Lecture 21-The goods market in an open economy I.pdf

Lecture 21-The goods market in an open economy I.pdf -...

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30-Jan-18 1 MACROECONOMICS LECTURE 21 THE GOODS MARKET IN AN OPEN ECONOMY I CONTENTS OF THE LECTURE 1. The demand for goods in an open economy 2. Equilibrium output and the trade balance 3. Effects of an increase in government spending 4. Effects of an increase in foreign demand CONTENTS OF THE LECTURE 1. The demand for goods in an open economy 2. Equilibrium output and the trade balance 3. Effects of an increase in government spending 4. Effects of an increase in foreign demand
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30-Jan-18 2 1. THE DEMAND FOR GOODS IN AN OPEN ECONOMY From Lecture 7 we know that aggregate demand ( Z ) is determined as: 4 M X G I C Z Domestic demand Trade balance (or net exports) We already know the determinants of domestic demand : G =exogenous What about the factors that affect imports and exports ? ) ( T Y C C ) , ( i Y I I 1. THE DEMAND FOR GOODS IN AN OPEN ECONOMY 5 Imports depend on: (a) Domestic income ( Y ) : higher domestic income leads to a higher domestic demand for all goods, both domestic and foreign. (b) The real exchange rate ( ε ) (the price of domestic goods in terms of foreign goods): the more expensive domestic goods are relative to foreign goods, the higher is the domestic demand for foreign goods.
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