2-Country Keynesian Model Equilibrium

Shourjyo biswas
Assuming linear consumption and import functions, exogenous investment and
government expenditure, solve the
equilibrium expressions for Y and Y* in the two-country Keynesian Model.

The two-country Keynesian model assumes that there are two countries, country A and
country B, each with its own GDP (Y and Y* respectively). The model assumes that
consumption (C and C*) and imports (M and M*) are linear functions of GDP and that
investment (I and I*) and government expenditure (G and G*) are exogenous. The
equilibrium expressions for Y and Y* can be derived as follows:

In country A:

Y = C + I + G + X - M

where X is the country's exports. Assuming linear consumption and import functions,
we can express C and M as follows:

C = c0 + c1Y

M = m0 + m1Y*

where c0 and m0 are the autonomous consumption and imports, and c1 and m1 are the
marginal propensities to consume and import.

Substituting these expressions into the equilibrium expression for Y, we get:

Y = c0 + c1Y + I + G + X - (m0 + m1Y*)

Rearranging and solving for Y, we get:

Y = (c0 + I + G + X - m0) / (1 - c1 + m1)

Similarly, in country B:

Y* = c0* + c1Y + I* + G* + X* - M*

where c0* and m0* are the autonomous consumption and imports in country B, and c1*
and m1* are the marginal propensities to consume and import in country B.

Substituting these expressions into the equilibrium expression for Y*, we get:

Y* = (c0* + I* + G* + X* - m0*) / (1 - c1* + m1*)

Thus, the equilibrium expressions for Y and Y* in the two-country Keynesian model
are:

Y = (c0 + I + G + X - m0) / (1 - c1 + m1)

Y* = (c0* + I* + G* + X* - m0*) / (1 - c1* + m1*)

where c0, c1, m0, m1, c0*, c1*, m0*, and m1* are all parameters that depend on the
specific characteristics of each country.
Shourjyo biswas
Derive the expression of the multiplier for a
domestic expansion in the 2-country model, using i. Calculus, and ii. Geometric
Progression. Interpret the Repercussion Effect
using the expression of the multiplier.

The multiplier is a measure of the change in equilibrium output resulting from a

change in autonomous spending (such as investment or government expenditure). It is
calculated as the ratio of the change in equilibrium output to the initial change
in autonomous spending.

To derive the expression of the multiplier for a domestic expansion in the two-
country model, we can start by assuming that country A experiences an increase in
autonomous spending (I, for example). This increase in autonomous spending will
lead to an increase in equilibrium output (Y) in country A, which in turn will lead
to an increase in imports (M) from country B. This increase in imports from country
B will increase the level of output (Y*) in country B, which will then lead to an
increase in imports (M*) from country A. This process continues until a new
equilibrium is reached.

i. Calculus approach:

To derive the expression of the multiplier using calculus, we can start with the
equilibrium expression for Y in country A:

Y = (c0 + I + G + X - m0) / (1 - c1 + m1)

Taking the derivative of Y with respect to I, we get:

dY/dI = 1 / (1 - c1 + m1)

This derivative represents the marginal propensity to consume in country A (i.e.,

the fraction of an additional unit of income that is consumed). The multiplier is
the inverse of the marginal propensity to consume, so we have:

Multiplier = 1 / (1 - c1 + m1)

ii. Geometric progression approach:

To derive the expression of the multiplier using geometric progression, we can

start by assuming that the initial increase in autonomous spending (I) leads to a
change in output (ΔY) in country A. This change in output leads to a change in
imports (ΔM) from country B, which leads to a change in output (ΔY*) in country B,
which leads to a change in imports (ΔM*) from country A, and so on. The total
change in equilibrium output can be expressed as:

ΔYtotal = ΔY + ΔY* + ΔY** + ...

where ΔY*, ΔY**, etc. are the successive rounds of increases in output resulting
from the initial increase in autonomous