--%>
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 : Plan and non-plan expenditure Write a

    Write a brief note on plan and non-plan expenditure of the government with illustration. Answer: Plan Expenditure

    		•
  • Q : Supply of foreign currencies into

    What are the main sources of supply of foreign currencies into domestic economy? Answer: A) Foreigners purchasing home country’s goods and services via exports. B) Foreign investment in home country via

    		•
  • Q : Define Break Even point Define Break

    Define Break Even point? Elucidate with the help of saving function. Answer: Breakeven point is a point where consumption equals to income and saving is equivalent t

    		•
  • Q : Consumer Equilibrium of two goods The

    The consumer reaches equilibrium for any two goods X and Y whenever the: (1) MUx/Px = MUy/Py. (2) MUx/MUy = Py/Px. (3) Utility from X equivalents the utility produced by Y. (4) Point of diminishing returns is arrived at. Can someon

    		•
  • Q : Opportunity costs of consumption

    Individuals maximize the satisfaction whenever the marginal utilities of all goods are: (i) Precisely proportional to the consumer’s income. (ii) Maximized. (iii) Precisely proportional to the opportunity costs of consuming them. (iv) Equivalent

    		•
  • Q : Transactions demand for money The basic

    The basic determinant of the transactions demand for money is the

    		•
  • Q : Speculators actions when they are right

    When speculators are right, their actions: (1) Cause already depressed prices to drop/fall further. (2) Raise the risks to another firm of doing business. (3) Prevent price refuses from their peaks. (4) Reduce both the phase of prices and their volatility across time.

    		•
  • 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 : IMF? In saying that the present system

    In saying that the present system of floating exchange rates is managed we mean that: IMF officials determine exchange rates on a day-to-day basis. countries that allow their exchange rate to move freely will lose their borrowing privileges with the IMF. the value of any IMF member's currency

    		•
  • Q : Microeconomics is studying economic

    is studying economic worth your time and effort

    		•