Chap024 - Chapter 24 National Income and the Current...

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Chapter 24 – National Income and the Current Account CHAPTER 24 NATIONAL INCOME AND THE CURRENT ACCOUNT Learning Objectives: To understand how the incorporation of a foreign trade sector into a Keynesian income model alters the domestic saving/investment relationship and changes the multiplier. To recognize that national income equilibrium may not be consistent with equilibrium in the current account. To learn why income levels across countries are interdependent. I. Outline Introduction - How Does GDP Growth Cause Trade Deficits? The Current Account and National Income - The Keynesian Income Model - Determining the Equilibrium Level of National Income - The Autonomous Spending Multiplier - The Current Account and the Multiplier - Foreign Repercussions and the Multiplier Process An Overview of Price and Income Adjustments and Simultaneous External and Internal Balance Summary Appendix A: The Multiplier When Taxes Depend on Income Appendix B: Derivation of the Multiplier with Foreign Repercussions II. Special Chapter Features Titans of International Economics: John Maynard Keynes (1883-1946) In The Real World: Average Propensities to Import, Selected Countries In the Real World: Multiplier Estimates for India In The Real World: Correlations of Macroeconomic Variables across Countries III. Purpose of Chapter The purpose of this chapter is to introduce the students to the manner in which changes in the current account influence the aggregate macroeconomy and the mechanism by which changes in the macroeconomy influence the current account. The material forms a necessary foundation for the remaining chapters in the text. 24-1
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Chapter 24 – National Income and the Current Account IV. Teaching Tips . A. The opening vignette can be used to make sure that the students realize that the foreign trade sector of the economy is not something separate from the rest of the economy – rather, it is intricately interdependent with developments in the “internal” sector. B. The basic Keynesian model developed should be familiar to your students because most principles books now include the foreign sector in the model (although sometimes only in appendixes to chapters). Therefore, we recommend that you not devote too much class time to the purely mechanistic material in this model. C. Note that we make imports dependent on total income and not on disposable income. If you choose to make them dependent upon disposable income, you will end up with a different formula for the autonomous spending multiplier, as we indicate in expression [23] in Appendix A. D. Some international economics texts call the open-economy multiplier the “foreign trade multiplier.” We recommend that you not use that term, however, since we think that it is misleading – the multiplier does not apply only to autonomous changes in the foreign trade sector of the economy. E.
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This note was uploaded on 11/27/2009 for the course ECON 421 taught by Professor Macphee,c during the Spring '08 term at UNL.

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Chap024 - Chapter 24 National Income and the Current...

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