[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Second, factors such as exchange rates and income developments in other
countries can affect net exports and lead to shifts in the AE schedule. A recession
in Europe will reduce U.S. exports and shift the aggregate expenditures schedule
for the United States down. In the absence of any other change, equilibrium output
in the United States will fall. In the late 1990s, the financial crises and subsequent
recessions in many Asian economies raised the concern that the resulting fall in
U.S. exports would lead to a recession here. The drop in exports shifted the AE
schedule for the United States down. Fortunately, not everything else remained
unchanged, and the United States continued to enjoy an economic boom. This bit of
recent history illustrates an important point. We often use our theoretical models to
illustrate what would happen if one factor changed, when all other things were
held constant, because doing so enables us to understand clearly the distinct
effects of changes in each factor. In the real world, however, many of the things we
assumed to be constant are also changing, and we need to use our models to analyze
simultaneous changes in many factors.
PUTTING INTERNATIONAL TRADE INTO
THE EQUATION
When we add exports (X) and imports (M), aggregate expenditures are given by
AE = C + I + G + X − M.
Imports are related to disposable income by the import function,
M = MPI × Y d ,
where MPI is the marginal propensity to import. Exports are assumed to be fixed.
Hence, aggregate expenditures are
AE = a + MPC × (1 − t) × Y + I + G + X − MPI × (1 − t) × Y.
Since aggregate expenditures equal income, in equilibrium,
so the multiplier is
Y = (a + I + G + X)/[1 − (1 − t)(MPC − MPI)],
1/[1 − (1 − t)(MPC − MPI)].
If t = .25, MPC = .8, and MPI = .1, the multiplier is
1/[1 − .75(.8 − .1)] = 2.1,
smaller than it was in the absence of trade (2.5).
680 ∂ CHAPTER 30 AGGREGATE EXPENDITURES AND INCOME