Consider country A in the context of the 4-sector open economy model we discussed in the unit. Households in country A tend to spend 65% of any additional disposable income. The amount of autonomous consumption expenditure, independent of one’s disposable income, is estimated to be $50 (billion).The rest of the economy can be characterised by the following behavioural equations.C=50+0.65(Y−T)I=100+0.2Y−300iG=720T=160+0.25YX=360M=170+0.1Yi=0.01 Flag question: Question 1Question 1Tips2 ptsThe budget balance is and the trade balance is
Question
Consider country A in the context of the 4-sector open economy model we discussed in the unit. Households in country A tend to spend 65% of any additional disposable income. The amount of autonomous consumption expenditure, independent of one’s disposable income, is estimated to be $50 (billion).The rest of the economy can be characterised by the following behavioural equations.C=50+0.65(Y−T)I=100+0.2Y−300iG=720T=160+0.25YX=360M=170+0.1Yi=0.01 Flag question: Question 1Question 1Tips2 ptsThe budget balance is and the trade balance is
Solution 1
To find the budget balance, we need to subtract total taxes (T) from government spending (G).
From the given equations, we know that: G = 720 T = 160 + 0.25Y
Substituting the value of T into the budget balance equation gives us:
Budget Balance = G - T Budget Balance = 720 - (160 + 0.25Y)
To find the trade balance, we need to subtract total imports (M) from total exports (X).
From the given equations, we know that: X = 360 M = 170 + 0.1Y
Substituting the value of M into the trade balance equation gives us:
Trade Balance = X - M Trade Balance = 360 - (170 + 0.1Y)
So, the budget balance is 720 - (160 + 0.25Y) and the trade balance is 360 - (170 + 0.1Y).
Solution 2
The budget balance is calculated as the difference between government tax revenue (T) and government spending (G).
Given the equations:
T = 160 + 0.25Y G = 720
Substitute T into the budget balance equation to get:
Budget Balance = T - G Budget Balance = (160 + 0.25Y) - 720 Budget Balance = -560 + 0.25Y
The trade balance is calculated as the difference between exports (X) and imports (M).
Given the equations:
X = 360 M = 170 + 0.1Y
Substitute X and M into the trade balance equation to get:
Trade Balance = X - M Trade Balance = 360 - (170 + 0.1Y) Trade Balance = 190 - 0.1Y
So, the budget balance is -560 + 0.25Y and the trade balance is 190 - 0.1Y.
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