Definition of Open Economic

(Four-sector Economy)
Open economy is an economic model that
distinguishes economic activity actors into
four groups, namely firms, households,
government, and foreign sectors. in the
balance analysis, in an open economy it is
primarily concerned with exports and
imports of the national income balance.
Circular Flow 4 Sectores
5 Types of Aggregate Expenditure
1. Household consumption expenditure for
goods produced domestically. (Cdn)
2. Company investment (I) to increase the
capacity of the company sector to produce
goods and services.
3. Government expenditure for goods and
services produce domestically. (G)
4. Export is purchase of other countries for
goods made by domestic company. (X)
5. Import is purchase from foreign. (M)
Aggregate Expenditure Formula
AE = C + I + G + (X – M)
Description :
AE : Agregat Expenditure
C : Consumption
I : Investments
G : Government
X : Export
M : Import
 Answer
a) Y = C + I + G + ( X-M )

Y = 440 + 0.80Yd + 10 + 0.05Y + 15 + 15 + 0.10Y – (4+0.01Y)

Y = 440 + 0.80 (Y + 20 – ( -10 + 0.05Y) + 10 + 0.05Y + 15 + 15 + 0.10Y –
4 -0.01Y
Y = 440 + 0.80 (Y + 20 +10 - 0.05Y) + 10 + 0.05Y + 15 + 15 + 0.10Y –4 -
0.01Y
Y = 440 + 0.80 (0.95Y + 30) + 10 + 0.05Y + 15 + 15 + 0.10Y – 4 - 0.01Y
Y = 440 + 0.76Y + 24 + 10 + 0.05Y + 15 + 15 + 0.10Y – 4 - 0.01Y
Y = 500 + 0.90Y
Y = 5000
 Answer
b). Taxes received by the government :

tx = -10 + 0.05Y

tx = -10 + 0.05 (5000)

tx = -10 + 250

tx = 240
Determinants of Export and Import

• Domestic prices
• Overseas prices
• Changes in the value of foreign exchange
rates
• Income of foreign residents
Export Determinants
If the goods are needed by other countries and
they cannot produce these goods or their
production cannot meet domestic needs
Quality goods

The taste of foreign people towards exported goods

Technological progress and the country's economy

National income does not affect exports, but

exports will increase national income
Export Function and Changes
Import Determinants
The level of state income

Domestic inflation

The ability of a country to make goods

Consumer taste
Export Function and Changes

• Exports are seen as autonomous spending,

expenditure of which the amount remains at
various levels of national income

• Export Function : X = Xo
 Import Function and Changes

The import function describes the relationship between imports and

national income :

M : Mo mY
Description :
M : Import
Mo : Autonomous import
m : Maginal Propensity to Import
Y : National Income
Import Function and Changes
 QUIZ TIME!!!

Indonesian wheat imports from

Australia are shown in the
autonomous import of 25 and
marginal propensity to import is 0,5.
What is the import value if the
national income is 600 and show the
equality of functions!
 Answer

Mo = 25
m = 0.5
Question: M when Y = 600?
Answer:
M = Mo + m.Y
M = 25 + 0.5 Y
M = 25 + 0.5 (600)
M = 325
 Open Economic Balance
Requirements
1. Aggregate Supply Equals Aggregate Expenditure
a. Aggregate Supply
AS = Y + M

b. Aggregate Expenditure
AE = Cdn + I + G + X + M C = Cdn + M

AE = C + I + G + X
AS = AE
Y+M=C+I+G+X
Y = C + I + G + (X – M)
 2. Injection equals Leak

Injections in an open economy are inflows into the Leakage in an open economy is the flow of
circulation of income streams. The injection covers expenditure or income out of the circulation of income
3 types of expenditure, namely investment(I), streams. These leaks include savings(S), taxes(T),
government expenditure(G), and export(X). and imports(M).

In the leak-injection approach, the balance of national income in an open economy is achieved in
the following circumstances

I+G+X =S+T+M
 The equation is obtained because:

1. National income (Y) after deducting

corporate taxes and individual taxes:

Yd = Y - corporate tax - individual tax When AS = AE

Yd = Y - T Y=C+I+G+X-M

So that:
Disposable income is used for:
1. To buy goods at home and abroad: C+I+G+X-M=C+S+T
C = Cdn + M
2. For savings (S) I+G+X=S+T+M
Yd = C + S
So that:
Y-T=C+S
Y=C+S+T
 Quiz Time!!
Known:
Usage function: C = 500 + 0.8Yd
Tax 25% of national income T = 0.25Y
Private investment I = 500
Government expenditure G = 1,000
Export X = 800
Import 10% of national income M = 0.1Y
Asked:

a.Function consumption as a function of Y

b. National income on balance with the AE approach and leakage injections
c. To achieve full employment at Yf = 6000, which changes need to be made:
(i) Taxes are reduced
(ii) Government expenditure is increased
d. State the position of the government budget on initial balance and on full employment
opportunities. State the new tax function.
e. Do exports always exceed imports in both balances?
f. Make conclusions about the multiplier in the open economy.
 Answer

a. C = 500 + 0,8Yd

Yd = Y – T

Yd = Y – 0,25Y b. Y = C + I + G + X – M

Yd = 0,75Y Y = 500 + 0,6Y + 500 + 1000

+ 800 – 0,1Y
C = 500 + 0,8(0,75Y)
Y = 2800 + 0,5Y
C = 500 + 0,6Y
Y – 0,5Y = 2800

0,5Y = 2800

Y = 5600

c. By lowering taxes
If the tax on full employment
is Tf while the national income
(Yf) = 6000, then:
Y=C+I+G+X-M
C = 500 + 0.8 (Y - Tf)
Y = 500 + 0.8Y - 0.8Tf + 500 +
1000 + 800 - 0.1Y
Y = 2800 + 0.7Y - 0.8Tf
6000 = 2800 + 0.7 (6000) -
0.8Tf
6000 = 2800 + 4200 - 0.8Tf
0.8Tf = 2800 + 4200 - 6000
0.8Tf = 1000
Tf = 1250
Answer
If the tax does not change at Yf = 6000, the tax amount:
T = 0.25Y
T = 0.25 (6000) = 1500
Thus to achieve full employment opportunities taxes are
reduced by:
1500 - 1250 = 250
By increasing government spending
If G at Yf = 6000 is Gf, then:
Y = 500 + 0.6Y + 500 + Gf + 800 - 0.1Y
Y = 1800 + 0.5Y + Gf
6000 = 1800 + 0.5 (6000) + Gf
6000 = 1800 + 3000 + Gf
6000 - 4800 = Gf
Gf = 1200
The calculation shows that to achieve full employment
opportunities, government spending needs to be
increased by 1200 - 1000 = 200.
 Answer
d. Government budget and tax function:
• On initial balance: • Increased Government
Y = 5600 Expenditures
T = 0.25Y = 0.25 (5600) = 1400 G = 1200
G = 1000 T = 0.25Y = 0.25 (6000) = 1500
Then the government budget has a surplus of T Then T (1500)> G (1200) then
- G = 1400 - 1000 = 400 there is a surplus of 1500 - 1200
• Tax Reduction: = 300.
T = 1250 New tax function:
G = 1000 T = To + 0,25Y
Then T (1250)> G (1000) then there is a The new tax amount (after
surplus of 250. deducting) is T = 1250. Then:
T = To + 0,25Y
1250 = To + 0.25 (6000)
`1250 = To + 1500
To = 1250 - 1500
To = -250
So the new tax function is
T = -250 + 0.25Y
 Answer

e. Import Export Balance: At Y = 6000

Export = X = 800
At Y = 5600
Export = X = 800 Imports = M = 0.1Y =
Imports = M = 0.1Y = 0.1 0.1. (6000) = 600
(5600) = 560 So export (X = 800)>
So export (X = 800)> import import (M = 600)
(M = 560) There are advantages
There are advantages in the
in the trade balance
trade balance
 Answer

f. The multiplier is defined as a number that shows the ratio between

the increase in national income (∆Y) and the increase in aggregate
expenditure (in this case represented by ∆G).

∆Y = 6000 - 5600 = 400

∆G = 1200 - 1000 = 200

Thus, the economic multiplier in this case is: 400/200 = 2

 National Income Balance Graph

Aggregate
expenditure
Aggregate demand-
supply approach

Injections and
Leaks

Injections-Leaks
Approach

National Income
 Balance Change

Changes in household expenditure (C), changes in injection components (I, G, X), and
changes in leakage components (S, T, M), can affect the balance of national income.

In an open economy, the

National
(C, I, G, X) multiplier will always be smaller
Income
than the multiplier in a 3-sector
economy. the difference is
caused because in the analysis
of the balance in an open
economy, for example imports
National are proportional to national
S, T, M income and means that with
Income
imports, the leakage rate
becomes greater and reduces
the level of aggregate
expenditure increase.
 QUIZ
If function C = 500 + 0.8Yd
Tax 25% of national income T = 0.25Y
I = 500
G = 1,000
X = 800
Import 10% of national income M = 0.1Y
asked:
a.Function consumption as a function of Y

b.National income on balance with the AE approach and leakage

injections
 b.Y = C + I + G + X – M
a. C = 500 + 0,8Yd
Y = 500 + 0,6Y + 500 + 1000 +
Yd = Y – T
800 – 0,1Y
Yd = Y – 0,25Y
Y = 2800 + 0,5Y
Yd = 0,75Y
Y – 0,5Y = 2800
C = 500 + 0,8(0,75Y)
0,5Y = 2800
C = 500 + 0,6Y
Y = 5600
 MULTIPLIER IN THE
OPEN ECONOMY

Assumptions used: Then national income is

in balance:
C = a + bYd
Y=C+I+G+X-M
I = Io
Y = a + bYd + Io + Go +
G = Go Xo - mY

T = tY so Yd = Y - T = Y Y = a + b (Y - tY) + Io +
- tY Go + Xo - mY

X = Xo Y = a + bY - btY + Io +
Go + Xo - mY
M = mY
 QUIZ TIME!!!

Known:
Tr = 50 Appointed:
G = 60 a.National income on balance?
I = 40 + 0.05Y b. disposable income and
T = 10 + 0.25Y consumption?
X = 120 c. How much savings?
M = 10 + 0.25Y
C = 70 + 0.8Yd d.What is the condition of the
government budget and balance of
payments?
e.If G becomes 138, what is the
multiplier?
 Answer
a. Y = C + I + G + X - M
b. Yd = Y - Tx + Tr
Y = 102 + 0.6Y + 40 + 0.05Y + 60 c. S = Yd - C
Yd = Y - (10 + 0.25Y) + 50
+ 120 - (10 + 0.25Y) S = -70 + 0,2(0,75Y +
Yd = Y - 10 - 0.25Y + 50
Y = 102 + 0.6Y + 40 + 0.05Y + 60 40)
Yd = 0.75Y + 40
+ 120 - 10 - 0.25Y S = -70 + 0.15Y + 8
Yd = 0,75(520) + 40
Y = 312 + 0.4Y S = -62 + 0.15Y
Yd = 390 + 40
Y - 0.4Y = 312 S = -62 + 0.15 (520)
Yd = 430
0.6Y = 312 S = 430 - 414
C = 70 + 0.8Yd
Y = 520 S = -62 + 78
C = 70 + 0.8 (0.75Y + 40)
d. G = 60 C = 70 + 0.6Y + 32 S = 16
T = 10 + 0.25Y C = 102 + 0.6Y
T = 10 + 0.25 (520) C = 102 + 0.6Y
T = 10 + 130 = 140 C = 102 + 0.6 (520)
Because T> G (140> 60) there is a surplus of C = 102 + 312
80 C = 414
X = 120
M = 10 + 0.25Y
M = 10 + 0.25 (520) e. If G becomes 138 → ∆G = 138 - 60 = 78
M = 10 + 130 = 140
Because X <M (120 <140) a deficit of 20
occurs
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