International Economics
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Dominick-Salvatore-International-Economics
adjustment mechanism. This relies on induced changes in the level of national
income of the deficit and the surplus nations to bring about adjustment in the balance of payments. The automatic income adjustment mechanism represents the application of Keynesian economics to open economies (i.e., to nations engaging in international transactions). This is distinguished from the traditional or classical adjustment mechanism (presented in Chapter 16), which relied on automatic price changes to bring about adjustment in the balance of payments. As in Chapter 16, we assume here that the deficit or surplus arises in the current account of the nation. However, while we implicitly assumed in Chapter 16 that national income remained constant and adjustment was brought about by automatic price changes, we now assume that all prices remain constant and we examine how automatic income changes lead to balance-of-payments adjustment. Specifically, in order to isolate the automatic income adjustment mechanism, we begin by assuming that the nation operates under a fixed exchange rate system and that all prices, wages, and interest rates are constant. We also assume initially that nations operate at less than full employment. In the real world, balance-of-payments disequilibria not only affect national incomes but also exert pressure on exchange rates, prices, wages, and interest rates. Thus, to some extent, all automatic adjustments are likely to operate simultaneously. Such a synthesis is presented in the last two sections of this chapter. 541 Salvatore c17.tex V2 - 10/26/2012 12:52 A.M. Page 542 542 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments In Section 17.2, we review (from principles of economics) the concept and the deter- mination of the equilibrium national income and the multiplier in a closed economy. In Section 17.3, we extend the concept and examine the determination of the equilibrium level of national income and multiplier in a small open economy. Section 17.4 further extends the presentation to include foreign repercussions that arise when the nations are not small. For- eign repercussions arise because any change in a large nation’s level of national income and trade affects the national income and trade of the partner, and these in turn have secondary effects (repercussions) on the first nation. Indeed, this is how business cycles are trans- mitted internationally. Section 17.5 examines the price and income adjustment mechanisms together. Finally, Section 17.6 discusses monetary adjustments and presents a synthesis of all automatic adjustments, pointing out the disadvantages of each automatic mechanism and the need for adjustment policies. In the appendix, we present the mathematical derivation of the foreign trade multipliers with foreign repercussions, and then we examine the transfer problem (building on the discussion in the appendix to Chapter 12). 17.2 Income Determination in a Closed Economy In this section, we review the concept and determination of the equilibrium national income and the multiplier in a closed economy (i.e., an economy in autarky or without international trade). These concepts were covered in your principles of economics course and represent our point of departure for examining the equilibrium level of national income and the multiplier in a small open economy (in Section 17.3). Since in this chapter we examine the op- eration of the automatic income adjustment mechanism, we do not need to include the government sector in our model. The government sector will be added to our model in the next chapter, which deals with fiscal and other policies. 17.2 A Determination of the Equilibrium National Income in a Closed Economy In a closed economy without a government sector, the equilibrium level of national income and production (Y) is equal to the desired or planned flow of consumption (C) plus desired or planned investment expenditures (I), as indicated in Equation (17-1): Download 7.1 Mb. Do'stlaringiz bilan baham: |
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