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.
16. Deriving the Aggregate Expenditures Model
AE Model: Private Open Economy