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National Income Foreign Trade Multiplier

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Question:

Discuss About The National Income Foreign Trade Multiplier?

 

Answer:

Introducation

The rise in the unit tax for carbon effectively reduce the market externality. Initially, Q tonnes of carbon were produced at a price P; the introduction of unit tax raised the costs of producing carbon and thus the suppliers were forced to cut their production from Q to Qt; this was from a shift in supply curve from S to S1. Hannam (2014) supported this argument by noting that the carbon tax was successful in lowering carbon emissions.  The result was a price rise for carbon which discourage the consumption by the households; consequently the level of carbon emissions fell (Twomey, 2014). However, this resulted in a loss of efficiency in the carbon market. The social optimal level of carbon production was Q at a price P. The demand for energy is inelastic to price and thus the consumers suffer when price rises. A deadweight area abx was recorded after the price rose to Pt.

The 15 billion compensation would add up to the household’s income and thus they will be able to demand extra units of carbon. The additional demand for carbon will stimulate the carbon producers to raise their level of production so as to meet the rising demand. Demand laws support the argument that price charged rises as demand rises over supply. The increased need to produce more will result in an increased employment since more labor will be a requisite. The carbon price level will rise one again.

The loss on consumer confidence means that they will lower their spending level. Thus, the households’ consumption component of the aggregate demand will be reduced. According to Uren (2017), the Australian economy is dragged down by the weak growth in consumer spending. The increased living costs are affecting the consumers’ budgets and thus they are not able to spend as much. For instance the housing and electricity prices have surged in the recent years; these extra spending on such goods is leaving less income to be spent on other goods and services and this explains the falling trend of Australian consumption expenditure growth. The Keynesian cross model below is used to explain the impact of the weak spending on the aggregate demand.

The equilibrium level between AD and Y is at point m; at this point, AD = Y. To the left of AD = Y, the Aggregate demand is lower than real GDP and to the right, the AD is greater than real GDP (Be?nassy, 2011). The initial AD curve is AD* = C + I + G + (X – M). Since we have noted that the weak consumer spending lowers the aggregate demand, the AD* curve will shift to the right to AD curve. The shift to the right results in a new equilibrium point created at point n; this is at a lower level of real GDP (Y).

According to Jericho (2017), the main reason why Adam Creighton claimed that the real Australian unemployment rate is above 20% is that the estimation for unemployment rate does not include some many potential workers. the measure include only those who are considered to be actively seeking; all those who are not actively seeking but could do a job if they had one are excluded. In an economy like Australia where there is a market failure in the labor market, it may take long before a potential worker lands into a job. A prolonged duration of job search discourages some workers and they fail to actively seek a job anymore; the government estimation of unemployment only considers the four past week’s active seekers. Thus government’s unemployment data obtained from the statistics bureau may be way lower than what is the actual Australian unemployment rate.

 


Creighton’s measure considered not only including the discouraged workers, but also the retirees and the stay-home-parents who have no employed jobs.  Further, he also included the underemployed in his measure. Some people may be working for only a few hours and be considered employed; someone working for an hour or two could as well be considered unemployed since the wage received is insufficient for meeting the personal needs. This hidden unemployment is difficult to estimate because not all people need a job. Some people are into businesses and thus may not participate in the labor force. Thus, considering all those seeking and not seeking unemployment to be unemployed would again bring issues. It is difficult to determine the job done by every person; most people will be dishonest.

Part a

Aggregate Expenditure function

AD = C + I + G + (X - M)

The autonomous expenditure is the spending that has to take place even if the income level was zero (Yadav, 2014). The consumption expenditure function is C = 40 + 0.9YD. In this case the autonomous consumption is 40.

Part b

Y = C + I + G + (X - M)

But, C = 40 + 0.9YD; I = 40; G = 60; T = 0.2Y; X = 14 M = 10 + 0.02Y. 

Y =

Y =

Y =

Y = 100 + 40 + 60 + 14 – 10 + 0.9Y - 0.18y - 0.02y

Y = 204 + 0.7Y

Y - 0.7Y = 204

0.3Y = 204

Y = 680

Therefore, the equilibrium level of income in this economy is 680.

Part c

When a demand injection in an economy changes, it results in a change in the national income; the number of time the national income changes as a result of the injection change is the multiplier concept (Pettinger, 2017).

In an open economy, equilibrium of the national income is achieved at the level where savings + imports = investment + exports (Taboola, 2017).

S + M = I + X

Any change on the left has to be accompanied by an equal change in the left for equilibrium to be maintained

Thus,

ΔS + ΔM = ΔI + ΔX

Change in saving (ΔS) = s.ΔY. Where; s = MPS (marginal propensity to save); ΔY = the change in national income. Change in imports (ΔM) = m.ΔY, where m = MPI (marginal propensity to import)

s.ΔY + m.ΔY = ΔI + ΔX

ΔY(s + m) = ΔI + ΔX

ΔY =

Thus the foreign trade multiplier is

But s = 1 – MPC; our consumption function is C = 40 + 0.9YD; MPC = 0.9; import function is M = 10 + 0.02Y, MPI = 0.02

Foreign trade multiplier =  =  = 8.333

Multiplying 8.333 by the  in exports (30-14 = 16) we get the change in national income

8.333*16 = 133.333

Change in national income = 133

 

References

Be?nassy, J. (2011). Macroeconomic theory. New York: Oxford University Press.

Hannam, P. (2014). Carbon price helped curb emissions, ANU study finds. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/environment/climate-change/carbon-price-helped-curb-emissions-anu-study-finds-20140716-ztuf6.html [Accessed 2 Oct. 2017].

Jericho, G. (2017). To those who claim Australia's unemployment data is dishonest – please stop | Greg Jericho. [Online] The Guardian. Available at: https://www.theguardian.com/business/grogonomics/2017/may/30/to-those-who-claim-australias-unemployment-data-is-dishonest-please-stop [Accessed 2 Oct. 2017].

Pettinger, T. (2017). The multiplier effect. [Online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/1948/economics/the-multiplier-effect/ [Accessed 2 Oct. 2017].

Taboola (2017). National Income and the Foreign Trade Multiplier. [Online] Economics Discussion. Available at: https://www.economicsdiscussion.net/national-income/foreign-trade-multiplier/national-income-and-the-foreign-trade-multiplier-2/10760 [Accessed 2 Oct. 2017].

Twomey, P. (2014). Obituary: Australia's carbon price. [Online] The Conversation. Available at: https://theconversation.com/obituary-australias-carbon-price-29217 [Accessed 2 Oct. 2017].

Uren, D. (2017). Weak spend a drag on economy. [Online] Theaustralian.com.au. Available at: https://www.theaustralian.com.au/business/opinion/david-uren-economics/weak-consumer-spending-a-drag-on-economic-growth/news-story/5cf5c25bbdb6e119f5ca8517dfc40430 [Accessed 2 Oct. 2017].

Yadav, G. (2014). How are autonomous expenditures determined? [Online] Quora. Available at: https://www.quora.com/How-are-autonomous-expenditures-determined [Accessed 2 Oct. 2017]

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