1.  Net Exports and Aggregate Expenditures  Exports (X) create domestic production, income and employment  Imports (M) represent goods and services produced abroad  In an open economy, aggregate spending is C+ I g + X n, where X n = (X - M)  X n can be either positive or negative ©2013 McGraw-Hill Ryerson Ltd.1Chapter 9.3

2.  If GDP in other countries is growing, demand for our exports will increase  Our imports are dependent on our own GDP  Both imports and exports are affected by the exchange rate  depreciation  appreciation 2©2013 McGraw-Hill Ryerson Ltd.Chapter 9.3

3. (1) Domestic output (GDP = DI) (billions) (2) Exports (X) (billions) (3) Imports (M) (billions) (4) Net Exports, X n (2)- (3) (billions) (5) Marginal propensity to import (MPM) Δ(3)/Δ(1) $370$40$15$+25 3904020 +20(20-15)/(390-370) = 0.25 4104025 +150.25 4304030 +100.25 4504035 +50.25 47040 00.25 4904045 -50.25 5104050 -100.25 5304055 -150.25 5504060 -200.25 ©2013 McGraw-Hill Ryerson Ltd.3Chapter 9.3

4.  Marginal Propensity to Import (MPM)  MPM = ΔM (import) / ΔGDP  MPM is the slope of net export schedule  Open Economy Multiplier  The closed economy the multiplier is 1/MPS  Expenditure on imports is a leakage  Open economy multiplier = 1/ (MPS + MPM) ©2013 McGraw-Hill Ryerson Ltd.4Chapter 9.3

5. ©2013 McGraw-Hill Ryerson Ltd.5Chapter 9.3 (1) Domestic Output (and Income) (GDP = DI), (billions) (2) Aggregate Expenditure for private economy (no G) (C+I g ), (billions) (3) Exports (X) (billions) (4) Imports (M) (billions) (5) Net Exports, X n (3)- (4) (billions) (6) Aggregate Expenditure for open economy (no G) (C+I g +X n ), (billions) $370$395 $40$15$+25 $420 390 410 4020 +20 430 410 425 4025 +15 440 430 440 4030 +10 450 455 4035 +5 460 470 40 0 470 490 485 4045 -5 480 510 500 4050 -10 490 530 515 4055 -15 500 550 530 4060 -20 510

6. Real GDP +10 0 -10 Net exports, X n (billions of dollars) Real domestic product GDP (billions of dollars) Aggregate expenditures (billions of dollars) 510 490 470 450 430 45° 430 450 470 490 510 Aggregate expenditures with positive net exports (C + I g +X n ) 0 Aggregate expenditures with negative net exports (C + I g +X n ) 2 (C + I g +X n ) 1 X n1 X n2 Positive net exports Negative net exports 450470490 LO4 11-6 ©2013 McGraw-Hill Ryerson Ltd.6Chapter 9.3

7.  A decline in net exports decreases aggregate expenditures and reduces GDP  A rise in net exports increases aggregate expenditures and increases GDP ©2013 McGraw-Hill Ryerson Ltd.7Chapter 9.3

8.  Prosperity Abroad  Tariffs  Exchange Rates ©2013 McGraw-Hill Ryerson Ltd.8Chapter 9.3

9. Source: World Trade Organization, WTO Publications, www.wto.org.www.wto.org ©2013 McGraw-Hill Ryerson Ltd.9Chapter 9.3