Question

If consumption is C=100+0.75Yd

Taxes is T=50+0.5Y

Export is X=200

Import is M=50+0.25Y

Government spending is G=150

Investment is I=200. Y is domestic income and Y is private disposable income. Determine the trade balance at equilibrium

Answer 1

Consumption is C=100+0.75Yd

Taxes is T=50+0.5Y

Export is X=200

Import is M=50+0.25Y

Government spending is G=150

Investment is I=200

here;

Y is domestic income

Y_d= Private disposable income

$Y= C+I+G+(X−M)$

$Y= 100+0.75(Y-T)+200+150+(200−(50+0.25Y))$

$Y=100+0.75(Y−(50+0.5Y)+350+(200-50-0.25Y)$

$Y=100+0.75(Y-50-0.5Y)+350+150-0.25Y$

$Y=100+0.75(0.5Y−50)+500−0.25Y$

$Y=600+0.375Y−37.5−0.25Y$

$Y=562.5+0.125Y$

$Y−0.125Y=562.5$

$0.875Y=562.5$

$Y=642.86$

$M=50+0.25Y$

$M=50+0.25(642.86)$

$M=50+160.715$

$M=210.715$

$Trade \space Balance= Export−Import$

           $= 200−210.715$

           $= −10.715$

Since the trade balance is negative 10.714 that is,. there is trade deficit in the economy.