Macroeconomics

(ECU_07202)
By
Dr. Mnaku H. Maganya
Senior Lecturer
Department of
Economics and Tax
Management
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 4. NET EXPORT (X – M)
Export is an injection and could increase
the national income through the foreign
trade multiplier, but import is a leakage.
Thus, net export (X-M), means the real
foreign sector minus the total import of
goods and services into the economy.

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Equilibrium Income in Four
Sector Model
Consider the following given equations
and identities in a four sector national
income model;
Y=C+I+G+X–M
But C = a + bYt
and M = dYt
Yt = Y(1 - t), disposable income.
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Y C  I  G  ( X  M )
Y a  bYt  I  G  X  dYt
but _ Yt Y (1  t )
Y a  bY (1  t )  I  G  X  dY (1  t )
Y a  bY  bYt  I  G  X  dY  dYt
Y  bY  bYt  dY  dYt a  I  G  X
Y (1  b  bt  d  dt ) a  I  G  X
Y * a  I  G  X /(1  b  bt  d  dt )
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Equilibrium Income in Four
Sector Model
Y=C+I+G+X–M
But C = a + bYt
M = dYt and given Yt = Y(1 - t)

a  I G  X
Y* 
(1  b  bt  d  dt )
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Example: In an economy which
engages in foreign trade, it is
assumed that Y = C + I + G + X −M
Where C = 0.9Yt; Yt = (1 − t)Y and
imports M = 0.15Yt
You are given: I = £200m G = £270m,
X = £180m, and tax rate (t)=20%
Find the equilibrium value of National
Income (Y*).
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National Income Determination
Y C  I  G  X  M
Y 0.9Yt  200  270  180  0.15Yt
 Yt (1  t )Y
Y 0.9(0.8)Y  0.15(0.8)Y  650
Y 0.72Y  0.12Y  650
Y 0.6Y  650
Y  0.6Y 650
0.4Y 650
Y * £1,625
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 National Income Determination
a  I G  X
Y* 
(1  b  bt  d  dt )
0  200  270  180
Y* 
((1  0.9)  (0.9  0.2)  0.15  (0.15 * 0.2)
650
Y*  1,650
0.4

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 MULTIPLIERS
Multiplier is the numerical
coefficient showing the effect of
a change in total national
investment on the amount of
total national income.
There are different types of
spending multipliers such as
investment, government spending
and import multipliers.
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 MULTIPLIERS
Spending Multipliers,
m:
1) Investment Multiplier
= mI
= 1/MPS
= 1/(1 – MPC)
Therefore, Y = 1/MPS x I
= mI x I
Y = mI
I
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Example 1: Investment Multiplier
Suppose Investment (I) change by
TZS10 million
and MPC = 0.75
Find investment multiplier and change
in income
Solution,
Multiplier = 1/MPS =1/0.25 = 4
Y = 1/MPS x I
= 1/0.25 X 10 mil.
= 4 X 10 mil.
= 40 mil.
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Example 2: In a closed economy with
no government, a £1 billion increase in
investment leads to a £5 billion increase
in income. What is the MPC?
We can infer from the information that
the value of the investment multiplier =
5
Therefore the marginal propensity to
save must be 0.2
Because MPS + MPC always equals 1
Then the MPC = 1-0.2 = 0.8
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 MULTIPLIERS
2) GOVERNMENT SPENDING MULTIPLIER
Y 1
= MPS
G
(assume an economy without tax, Yd =Y)
Therefore, Y = 1/MPS X G
Thus, national income increases by the
amount of Y as Government
increases spending.

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Government Multiplier
with proportional tax (t)
= 1
MPSt
= 1
(1 – b)(1 – t)

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 Government Multiplier with Lump
sum Tax, if tax T = a
Tax Multiplier, mT = 1 – Spending Multiplier
= 1 – 1/MPS
= – MPC/MPS
–b
=
(1 – b)
And, Y = mT T  T = Y
mT

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 If tax, T = a + tY
Tax Multiplier = -b
(1 – b)(1 – t)

= -b
(1 – b)(1-t)

Now, C = a + b(1-t)Y

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Example 3: Consider a 3 sector
economy with C=0.75Yt, Yt=(1-t)Y,
I=600 and G=900 while t = 20%
Find government expenditure
multiplier with a proportional tax
Multiplier =1/(1-b)(1-t)
=1/(0.25)(0.8)
=5

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3)OPEN ECONOMY
MULTIPLIER
The marginal propensity to import
(MPM) is the amount of
imports increase or decrease with each
unit rise or decline in disposable
income. The idea is that rising income
for businesses and households spurs
greater demand for goods from abroad
and vice versa.

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Marginal propensity to import (MPM)
is extra income that is spend on
import, while
Marginal propensity to consume
domestic product is MPC – MPM

1

(1  ( MPC  MPM )

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 Example
Suppose given
C = 200 + 0.5Yd
T = 100, G = 100, I = 200, IM = 0.2Y
X = 300
Yd = Y - T
You are required to find
i.) Equilibrium national income
ii.) Import Multiplier

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 Solution
Equilibrium National Income
Y=C+I+G+X-M
Y =200+0.5(Y-100)+200+100+300-0.2Y
Y*=(200-50+600)/(1-(0.5 - 0.3)) = 1071
Import multiplier = 1/(1-(MPC – MPM)
Import multiplier = 1/(1-(0.5-0.2) = 1.43

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 Example
Assume that, S = -80+0.25Y, and net export
is given as 100 - 0.05Y .
a. Find equilibrium level of income
b. If government expenditure increase by $55
and government imposes the lump sum
taxes worth $15 what impact will it have on
consumption function and national income
c. Find government expenditure multiplier
d. Find change in imports and import multiplier
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 Solution
a.) First derive the consumption function:
S = -80 + 0.25Y
Y=S+C
Y = -80 + 0.25Y + C
C = 80 + 0.75Y
Y=C+I+G+X–M
Y = 80 + 0.75Y + 100 – 0.05Y
Y = 80 + 100 + 0.75Y - 0.05Y
Y* = 600
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b.)The new consumption and equilibrium
income will be as follows:
C = 80 + 0.75 (Y – 15)
C = 68.75 + 0.75Y
New equilibrium income:
Y=C+I+G+X–M
Y = 68.75 + 0.75Y + 55 + 100 – 0.05Y
Y – 0.75Y + 0.05Y = 68.75 + 55 + 100
Y* = 745.83

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c.) Government expenditure multiplier
= △Y​/ △G
Change in income = 745.83 – 600 =
145.83
Change in government expenditure =
55 – 0 = 55
Government expenditure multiplier
= 145.83​/55 = 2.65
Government expenditure multiplier = 3

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d.) Change in imports:
Previous import = 0.05Y = 0.05(600) =
30
New import = 0.05Y = 0.05(745.83) =
37.29
Change in import = 37.29 – 30 = 7.29
Import multiplier = 1/(1-(MPC – MPM)
Import multiplier = 1/(1-(0.75-0.05) =
3.33

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 4. Balanced Budget
Multiplier
Its multiplier equivalent to one (1).
Y = 1 . G
Thus, the resulting increase in the
equilibrium Y is exactly equal to the
increase in G or T itself.
∆Y = ∆G = −∆T
It can be concluded that, although the
government does not spend more
than what it collects in tax revenue,
she still can stimulate the economy,
since the spending multiplier effect is
larger than the tax multiplier effect.

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Problem: Let’s say the government
increases spending by $1,000 and also
increases taxes by $1,000, and the
MPC equals 0.8. By how much will GDP
change?
Solution: The multiplier equals 5 and so
the tax multiplier equals -4. Therefore,
GDP will increase by $5,000. And GDP
will decrease by $4,000 from the
additional $1,000 in taxes. Thus, on
balance, equilibrium income (GDP) will
increase by $1,000
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Therefore, when the government
spends $1,000 and imposes taxes of
$1,000, it balances its budget, while
increasing equilibrium GDP by $1,000.
Thus, when the government changes
spending and taxes by the same
amount, then equilibrium income (GDP)
changes by 1 times this amount. We
say that
The balanced budget multiplier = 1.

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 Acceleration Principle
The acceleration principle is an
economic concept that draws a
connection between fluctuations in
consumption and capital investment.
An increase in production and
consumption results in high investments
while a decline in production and
consumption rate negatively impacts
investment demand.

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 Acceleration Principle
Symbolically α = ∆I/∆C,
where α stands for acceleration
coefficient; ∆I denotes the net changes
in investment outlays; and ∆C denotes
the net change in consumption outlays.
Suppose an expenditure of Tshs. 10
million on consumption goods leads to
an investment of Tshs. 20 million in
investment industries, then the
accelerator is 2.
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 Acceleration Principle
Multiplier reflects how a change in
investment affect income and
employment while accelerator reflects
how a change in production and
consumption affect investment.
For multiplier, consumption is
dependent upon investment, while
accelerator maintains that investment is
dependent upon consumption.

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THANK
YOU
FOR
LENDIN
G ME
YOUR
EARS.
That’s
all for
today.
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