Foreign Trade
Holmes
Econ 10
Open Economy
• One of our assumptions was a closed
economy
• A nontrivial portion of of our economy is in
fact due to foreign trade
Definitions
Imports (IM): value of goods produced in other countries
that are sold in the home country (US, say)
Exports (X): value of goods produced in the the US and
sold in other countries
Imports come IMto the country (sorry)
Specifications
How many more Toyotas would be sold in the US if Y
increased dramatically?
A: A few
How many more Fords would be sold in China if Y
increased?
A: none. Do the Chinese care how well we do?
Specifications
Imports are one type of good that consumers can choose
from.
Thus, as Y increase, IM should increase.
But Exports have no tie to domestic Y. Thus, Y should not
affect X.
IM
IM IM (Y , IM A ) 0
Y
X XA
Y and D
How are these affected?
What happens every time someone buys a Spice Girls CD?
The portion of C that is spent on foreign goods must be
subtracted out. That is, imports are a leakage from the D
stream. Likewise, every time someone buys a Ford, the
demand for US goods and services increases. Thus,
D=C+I+G+X-IM
Thus, MPS = MPC + MPI - MPIM
Model (wow!!)
Y D (in equilibriu m) YD Y T
Y C S T T
T T (Y , TA ) 1 0
D C I G X IM Y
C r rA
C C (Y , C A ) 0 1
YD deficit G T
I I P
I I (Y , I A , rA ) 0 ,0 P P(Y , PA ) 0
Y r Y
G GA N
N N (Y , N A ) 0
IM Y
IM IM (Y , IM A ) 0
Y tradedeficit IM X
X XA
New Marginal Propensity to Spend
D C I G X IM
D C I G X IM
Y Y Y Y Y Y
D C I IM
0 0
Y Y Y Why? Y
Flow Chart
dIM 0 dN 0 dIM
-(dS) 0 = dC 0 0
dX 0 0 dT
dG 0 multiplier
dP 0 0 0 0 dC 0
dN 0 dD 4 dY dYd dS 0
dI 0
dr 0 dIr 0 0
dT 0 dYd 0 dCat 0 0 dI
dSat 0 dP
TOTALS CHECK
total dG 0 total dS 0 C+I+G+X-IM 0
total dP 0 total dC 0 C+S+T 0
total dN 0 total dI 0
deficit 0 total dT 0
total dX 0 total dIM 0
Problem
dC/dYd 0.6 dI/dr -20 dP/dY 1/20 0.12
dI/dY 0.3 dT/dY 0.3 dN/dY 1/30 dIM/dY
Suppose Savings falls by 20 and we start sending 20 more
dollars in Cowboy hats to Japan
Find:
Mult
Change in Y
Effect on trade deficit
Answer
dIM 0 dIM 0 dN 12 dIM
-(dS) -20 = dC 20 3.33333
dX 20 30 dT
dG 0 multiplier
dP 0 40 100 70 dC 42
dN 0 dD 2.5 dY dYd dS 28
dI 0
dr 0 dIr 0 30
dT 0 dYd 0 dCat 0 5 dI
dSat 0 dP
TOTALS CHECK
total dG 0 total dS 8 C+I+G+X-IM 100
total dP 5 total dC 62 C+S+T 100
total dN 3.333 total dI 30
ddeficit -30 total dT 30
total dX 20 total dIM 12 dtrade def -8