Lesson_45_Walras's Law, Redux

# Lesson_45_Walras's Law, Redux - Walras's Law, Redux Have...

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1 Lesson 45 1 Walras’s Law, Redux Have been assuming that spending = income Apply Walras’s law,then the value of imports = value of exports Lesson 45 2 X XM M PD PD + Walras’s Law with 2 goods (X & M): X M PS + Spending Income Spending = Income X M X M ⇒+ =+ Lesson 45 3 Collect terms and rearrange ( ) ( ) M MM X X X PD S PS D ⇒− = Value of Exports (EX) Value of Imports (IM)

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2 Lesson 45 4 So, when spending = income, trade is balanced: IM EX = 0 EX IM −= Lesson 45 5 What if spending income? Case 1: Spending < Income Net positive saving/lending X XM M X M PD PD PS +< + Lesson 45 6 Collect terms and rearrange ( ) ( ) M MM X X X PD S PS D ⇒− < (EX) (IM) 0 EX IM ⇒−>
3 Lesson 45 7 We can re-write the spending/income expression to account for saving/lending: X XM M X M PD PD PS +< + Spending Income Lesson 45 8 We can re-write the spending/income expression to account for saving/lending: Saving/Lending X M X M ++ = + Lesson 45 9 Again combine and rearrange terms: ( ) ( ) Saving/Lending X MM X X X PD S PS D −+ = IM EX Saving/Lending EX IM ⇒−=

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4 Lesson 45 10
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## This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_45_Walras's Law, Redux - Walras's Law, Redux Have...

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