So now let's look at our aggregate expenditures model in a private open economy. So guess what? Just like the private closed economy, we're just going to be taking out variables here. Aggregate expenditures model, well this describes the relationship between spending and production. Okay. So private open economy is an economy that has no government, but if it's open, it does trade. So the only thing this one's missing is government. There is trade. There is investment. There is consumption. It's a country that does not have a government, right? But it does have trade in this case. So private closed economy, the closed and the open had to do with the trade. And the private versus let's say a public economy would have a government, okay? So there's no government here. So we still have our same aggregate expenditures model where we have spending as our aggregate expenditures and production as our GDP, right? So we've got our consumption just like we've been defining as that constant amount of A regardless of GDP and then we're going to have MPC times y. Okay? So here we do have investment and we do have net exports, but we don't have government purchases. Right? There's no government in this private open economy, so there's no government purchases. So these investment and net exports can be affected by the multiplier. If they change, there's going to be a multiplier effect on GDP. We'll discuss that more in future videos. I swear we're gonna get to it soon. But let's go ahead and see this graph for the private open economy. Guess what? Look what we've got again. We've got our 45-degree line. And how do you think we're gonna be finding our macroeconomic equilibrium? It's gonna be along the 45-degree line. Nothing much is going to change here. It's just the type of economy that we have. Now, what I would suggest is getting real familiar with the full equation, right? They just simplify it in these economies, right? These are just simpler versions of it. So what we have here again is we're going to have our consumption function C = 2 + 1 2 y and then we're going to add investment and add net exports to it. So consumption, just like we've been defining, right? There's going to be this 2 when there's no GDP at all. We've got 2. And as we add GDP, it's gonna go up at this rate of half of that. So if we add 2 GDP, it's gonna add 1 more to our consumption. And again, one more to our consumption and it's gonna be going up at that rate. So this is our consumption function right here. Right? We're just graphing the line 2 + y 0.5 , and that's our consumption right there. So let's go ahead and add investment to it, which is going to be C + I = 3 + y 0.5 . Right now, our intercept here is at 3 and it goes up at the same rate. The slope is the same. As we add 2, we're gonna add as 2 more GDP, there's going to be one more consumption, right? Because of that MPC of half. So again, we've got a line just like this. So that's our C+I. Remember when we talked about the private closed economy, this was our aggregate expenditures, but not in this case, right? Because we do have net exports. We're trading with other countries. There's just no government in this private open economy. Alright. So C I + NX . Well, this is going to be our aggregate expenditures here. Right? This is aggregate expenditures because there's no government purchases, but this is all the other purchases that there are. So 2 + 1 + y 0.5 + 0.5 gives us 3.5 for our intercept plus 0.5 y. Right? So it's gonna go up at that rate of 0.5 y. So we'll have this right here, 3.5 right there in the middle, and it's gonna go up at that same rate. So there we go. This is going to be our aggregate expenditures line in the private open economy. Okay. So it's going to look something like that. And this is going to be aggregate expenditures equals C+I+NX. Okay? Notice no government purchases in this economy. That's it. C+NX. And we can find our macroeconomic equilibrium just like before on that 45-degree line. And that's going to be right here approximately where aggregate expenditures equals 7 and our GDP equals 7. So by producing $7 billion worth of goods, there would be $7 billion worth of spending and we would be in equilibrium. So again, the theme here is that our equilibrium is where the aggregate expenditures line crosses the 45-degree line. Cool? And that'll tell us where our GDP and aggregate expenditures are equal. And that's about it. Nothing too crazy here with the private open economy. Let's go ahead and move on.
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
16. Deriving the Aggregate Expenditures Model
AE Model: Private Open Economy
Video duration:
5mPlay a video:
Related Videos