Foreign Trade

Foreign Trade

The foreign trade sector influences the level of national income in an economy in two ways:
1. Through the level of foreign expenditure on domestic exports, X. Exports are
assumed to be autonomous (fixed) and the export function is given as, X  X 0 .
Foreign expenditure on domestic exports will increase the level of national income
through its effect on the value of the autonomous components of expenditure.

1
Ye  . ( C 0  I 0  G 0  X 0) (3.34)
1  b(1  t )

2. Through the level of domestic expenditure on imports, - M. The import function is

given as,

M  M 0  mY (3.35)

where M 0 is autonomous imports and m is the marginal propensity to import,

M
m  MPM 
Y

The equilibrium condition is now given as,

Y  E  CI G X  M

 C 0  b(1  t )Y  I 0  G 0  X 0  M 0  mY

Solving for Y, the equilibrium level of national income is,

1
Ye  . (C 0  I 0  G 0  X 0  M 0 ) (3.36)
1  b(1  t )  m

© John Wiley and Sons 2013

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