Consider an ideal global economy consisting of two countries, Home and Foreign, trading with each other. Home country national income model: Y₁ = C₁ + I1,0 + X₁ - M₁ C₁320+ 0.8Y₁ M₁ = 0.2Y₁ Foreign country national income model: Y2 = C2 + 12,0 + X2 - M₂ C2220 +0.7Y2 M₂ = 0.1Y2 With mutual trade, the exports of Home (X₁) are imports for Foreign (M₂), and vice versa. Suppose I1,0 100 and I2,0 = 200. = = a) How would you interpret the expressions for M₁ and M₂? For example, which country relies more on imported commodities? Is this a good or bad thing? b) What conditions should be satisfied so that this global economy is in equilib- rium? c) Find the GDP levels of the two countries (Y₁ and Y₂) by expressing the problem in matrix form where the vector of unknowns is composed of only Y₁ and Y2. d) How much is the trade between them, and what is the trade balance?

Consider an ideal global economy consisting of two countries, Home and Foreign, trading with each other. Home country national income model: Y₁ = C₁ + I1,0 + X₁ - M₁ C₁320+ 0.8Y₁ M₁ = 0.2Y₁ Foreign country national income model: Y2 = C2 + 12,0 + X2 - M₂ C2220 +0.7Y2 M₂ = 0.1Y2 With mutual trade, the exports of Home (X₁) are imports for Foreign (M₂), and vice versa. Suppose I1,0 100 and I2,0 = 200. = = a) How would you interpret the expressions for M₁ and M₂? For example, which country relies more on imported commodities? Is this a good or bad thing? b) What conditions should be satisfied so that this global economy is in equilib- rium? c) Find the GDP levels of the two countries (Y₁ and Y₂) by expressing the problem in matrix form where the vector of unknowns is composed of only Y₁ and Y2. d) How much is the trade between them, and what is the trade balance?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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