L8._Net_Exports__Equilibrium_Income_and_Economic_Policy

What are exports in the context of net exports?

Goods and services made in the UK but sold abroad.

How do exports relate to foreign income and price competitiveness?

Exports depend positively on foreign income and negatively on the price competitiveness of foreign goods.

What is the formula for imports as a function of domestic income?

Imports = a + bY, where "a" represents autonomous imports, "b" represents the marginal propensity to import, and "Y" is domestic income.

What does the notation NX represent?

Net Exports, which is calculated as NX = X - IM.

How does a rise in foreign GDP affect net exports?

It causes the demand for exports to rise, shifting NX upwards.

What happens to net exports when domestic prices rise relative to foreign prices?

Home exports will fall, and imports will increase, causing the NX schedule to shift downwards.

What is the full model of equilibrium GDP in relation to net exports?

AE = Y = C + I + G + NX, showing the aggregate expenditure and how it equals national income.

What is the significance of the marginal propensity to import (m)?

It indicates how much imports will increase with a rise in income, affecting the overall multiplier.

A higher marginal propensity to import can reduce the effectiveness of fiscal stimulus by leaking spending to foreign markets, thereby impacting domestic economic growth.

What is the recommended policy combination for achieving internal and external balance?

A mix of fiscal policy (government spending and taxation) and monetary policy (control of money supply and interest rates). This approach aims to stabilize the economy while ensuring sustainable trade balances.

What does the Tinbergen principle state regarding economic policy?

To achieve two objectives simultaneously, independent policy instruments are required.

What limits the effectiveness of fiscal policy in an open economy?

Higher income from fiscal expansion leads to higher imports, which are a withdrawal from the circular flow of income.

As a result, the net impact on domestic output can be diminished, reducing the overall effectiveness of fiscal policy.

What are the implications of changes in autonomous taxes or government spending?

They lead to a parallel shift in the domestic saving function. This shift can influence aggregate demand and overall economic equilibrium, affecting output levels and income in the economy.

What is the key lesson regarding the multiplier effect on GDP with exogenous elements?

Any change in an exogenous spending element will change equilibrium GDP by a multiple of the initial change.