--%>
Assignment Help - homework help

Explain Product Market Equilibrium.

To begin with, let us recall our three-sector product-market equilibrium model given as 

C + I + G = C + S + T

To this three-sector model, we now add the foreign trade-the exports (X) and imports (M). with the addition of X and M, the four-sector product-market equilibrium condition is written as 

C + I + G + (X - M) = C + S + T 

The variables X and M need some explanation and quantification exports (X) of a country depend on a variety of factors governing the foreign demand for its goods and services. The inclusion of foreign demand parameters in the domestic model of a country is neither an easy task nor a necessity for a simplified model. Therefore, X is assumed to be a constant factor, that is,

X = X

As regards imports, imports (m) of a country are a function of a number of factors, however, for the sake of analytical simplicity; imports are treated as the function the country's national income(Y). That is import function takes the following form

M = + mY

Where, M is autonomous import and m is marginal propensity to import, the proportion of marginal national income spent on imports.

With X and M defined, the four- sector product-market equilibrium condition given in can be rewritten as 

C+ I + G + X - M - mY = Y = C + S + T 

The product-market equilibrium condition can also be expressed as 

Y = C + I + G + X - M - mY

Where C = a + by d( where Yd = Y - T = disposable income)

S = - a + (I - B) y (where I - B = mps)

I = I - Hi (where h > 0) 

G = G, (where G is constant)

T =T + t y, (where T is constant tax and t is tax rate <1)

By substituting the equilibrium level of income can be expressed as

Y = a + b [Y - (T + t Y)] + I - hi + G +X - M - my

=a + by - b t - bty + I - hi + G + X - M - my 

Y = 1 / 1-b+ bt + m (a - b T + I - hi + G + X - M

Y = 1 / 1 - b (1 - t) +m (a - b T + I - hi + G + X - m 

Note that the term 1/ (1 - b + bt + m) is tax-trade multiplier which may be redesignated as mu. Also let us designate the sum of the five constants, viz a, i. G, X, and M as A. by substitution these value 

Y = mu (a - b T - hi)

(Where mu is tax-trade multiplier and A = a + I + G + X - M)

Equation  gives the aggregate demand (AD) function in a four-sector model. 

   Related Questions in Macroeconomics

  • Q : Fiscal deficit in government budget

    What does fiscal deficit in government budget mean? Answer: This means more borrowing on the portion of government.

    		•
  • Q : Define Demand schedule What is Demand

    What is Demand schedule and how it is associated to demand curve?

    		•
  • Q : Custodian of nations foreign exchange

    Name the institution that acts as a custodian of nation’s foreign exchange reserves? Answer: The Central Bank is an institution that acts as custodian of natio

    		•
  • Q : Market shift when exporting When the

    When the U.S. furniture market is primarily in equilibrium at point e on S0D0 and then Chinese manufacturers start exporting more furniture to the United States, then this market would shift towards a new equilibrium at: (1) point a. (2) point b. (3) point c. (4) poin

    		•
  • Q : Principles of macroeconomics Explain

    Explain the concept of “economies of scale” and “increasing returns”.

    		•
  • Q : Define law of supply Law of supply : It

    Law of supply: It is the claim which, other things equivalent, the quantity supplied of a good increases whenever the price of the good increases.

    		•
  • Q : Redistribution of Income through budget

    Redistribution of Income: Each and every economy strives to achieve a society, where inequality of income and wealth must be minimum. In order to attain this objective via government budget the government spends adequate money on social security schem

    		•
  • Q : Revenue receipts and Capital receipts

    Elucidate the basis of categorizing government receipts into revenue receipts and capital receipts. Answer: Revenue Receipts: The government revenue receipts are such receipts A) that neither makes liability

  • Q : Domestic Investment & Economies

    Question: How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world, investment in both economi

    		•
  • Q : Employment Effect Fiscal policy

    Fiscal policy measures used for achieving full-employment level of output and price include increase in the government expenditure and cut in tax rates. A cut in tax rates eliminates only the adverse effect of high tax rates, whereas an increase in government expendit

    		•