--%>
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 : Illustration of equal marginal advantage

    Can someone please help me in finding out the accurate answer from the following question. Shoppers who shift among checkout lanes until it emerges that all register lines are probable to be equally time-consuming are trying to verify to the law of: (i) Equivalent mar

    		•
  • Q : Control of Inflation Economists agree

    Economists agree that inflation beyond a moderate rate is undesirable as it can often prove disastrous and therefore, it must be kept under control. Economists agree also that an appropriate mix of fiscal and monetary policies can be helpful in controlling inflation.

    		•
  • Q : Inflation Effect The economic effects

    The economic effects of inflation are all pervasive. It affects all those who depend on the market for their livelihood. The effects of inflation may be favorable or unfavorable, and low or high depending on the rate of inflation. For example a galloping the hyper inf

    		•
  • Q : Change in stock Why change in stock is

    Why change in stock is considered a portion of final expenditure? Answer: The Unsold stocks left with producers are supposed as purchased by the producers themselve

    		•
  • Q : Determinants of transaction demand.

    With the help of graph discuss the determinants of transaction demand.

    		•
  • Q : Limitation of credit availability What

    What occurs to economy, when credit availability is limited and credit is made costlier? Answer: Aggregate demands falls

    		•
  • Q : Define revenue receipts Define revenue

    Define revenue receipts. Write the groups in which they are categorized. Answer: Any receipts that do not either make a liability or lead to reduction in assets is

    		•
  • Q : Sources of demand for foreign currency

    State main sources of demand for foreign currency? Answer: The four main sources of demand for foreign currency are as follows: A) To buy services and goods from other countries. B) To send a gift abroad.

  • Q : Define the term Supply curve Define the

    Define the term Supply curve.

    		•
  • Q : Backward shifting of incidence tax When

    When firms bear the legal incidence of a tax, this is backward shifted while: (1) firms burden consumers by raising their prices. (2) the tax burden is borne by workers in the form of lower wages. (3) resource suppliers seek higher factor payments to

    		•