--%>
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 : Inflation Inflation is frequently

    Inflation is frequently described as "too much money chasing too few goods." Is this a satisfactory definition?

    		•
  • Q : Problem on perfect replacements Imports

    Imports and American cars are much close however not perfect replacements. When the U.S. govt. tried to enhance American car sales by setting a price ceiling of P1 on imported cars: (i) The quantity of cars imported will drop/fall from Q0 to Q1. (ii)

    		•
  • Q : Market system The market system's

    The market system's answer to the fundamental question "How will the system promote progress?" is essentially:

    		•
  • Q : Marginal utility of good at its maximum

    Can someone help me in finding out the right answer from the given options. The consumer maximizes utility whenever the spending patterns cause: (1) Marginal utility of each and every good to be at its maximum value. (2) Marginal utilities of each and every goods cons

    		•
  • Q : Problem on superior or luxury goods The

    The Income effects will be most strongly positive for: (1) Normal goods. (2) Necessities. (3) Superior or luxury goods. (4) Substitutes and much negative for the complements. Find out the right answer from the above options.

    		•
  • Q : Purchasing and consumption of

    The usual household maximizes the utility by spending all its money to purchase and consume a combination of goods which yields: (1) Fundamental physiological requirements and customary wants. (2) Maximum status and the social prestige. (3) Complete satisfaction of al

    		•
  • Q : Positional Goods problem Can someone

    Can someone help me in finding out the right answer from the given options. In accord with the theories of Thorstein Veblen, the positional goods from which the owner or user of the good derives the jollies mainly since of the power, class and status signaled by the p

    		•
  • Q : Problem on Imperfect information

    Imperfect information at times causes consumer’s attempts to maximize their contentment to fail since: (i) Prospects are imperfectly realized, and trial-and-error prototypes can lead to mistakes. (ii) Sellers might exploit asymmetric information

    		•
  • Q : The failure of the Supercommittee

    Question: Some commentators have argued that the failure of the "Supercommittee" is good thing for the economy?  Do you argree? Answer:

    Q : Describe open market operations

    Describe open market operations? What is its consequence on availability of credit? Answer: Open market operations signify the purchase and sale of government secur

    		•