--%>
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 : Relevance of matter-SWOT analysis

    Relevance of matter: Relevance of matter is very much important while choosing any goals. Are the goals relevant to the vision of the company? A goal of having maximum number of customers seems fantabulous, however at the same time bank needs to make

    		•
  • 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 : Long-term Federal government budget

    Question: Explain why there are long-term Federal government budget problems.   Explain why the base-line forecast of the CBO is misleading. Include in your answer why solutions to the problem will necessarily involve a decision about which

    		•
  • Q : Zero primary deficits What points out

    What points out zero primary deficits? Answer: Zero primary deficits signify that the government has to resort to borrowings simply to make interest payments.

    		•
  • Q : The market system 1. Examples of

    1. Examples of command economies are: A. The United States and Japan. B. Sweden and Norway. C. Mexico and Brazil. D. Cuba and North Korea.

    		•
  • Q : Explain about the marginalism theory

    Most economists believe such that people increase an activity when they perceive the expected additional benefits as exceeding the expected extra cost, but decrease their level of an activity whenever they believe the benefits from the last few units of the activity a

    		•
  • Q : Surplus of AD over AS-Inflationary gap

    Does a surplus of AD over AS always entail a condition of inflationary gap? Answer: No. Inflationary gap takes place only if AD > AS equivalent to full employmen

    		•
  • Q : Type of market when people cannot buy

    Whenever people can’t purchase all of a good they are willing and capable to pay for at present market price, there is surely a market: (1) Price ceiling. (2) Price floor. (3) Shortage. (4) Anomaly.  (5) Surplus. Please

    		•
  • Q : What is Bank rate Bank rate : This is

    Bank rate: This is the rate at which the central bank loans money to commercial bank.

    		•
  • Q : Tariffs Tariffs: -are also called

    Tariffs: -are also called import quotas. -may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs). -are per unit subsidies designed to promote exports. -are excise taxes on goods exported abroad.

    		•