A Simple Macro Model - Review

It is a demand-determined model with constant prices

Introducing Government

We make the assumption that the level of government purchases, G, is autonomous with respect to the level of national income. (government policy decision)

Net Tax Revenue is defined as the total tax revenue received by the government minus total transfer payments made by the government.

$$ T = tY $$

T ⇒ Net tax revenues

t ⇒ Net tax rate

Y ⇒ GDP

<aside> 💡 In the presence of government taxes and transfers, there is an important distinction between national income, $Y$, and disposable income, $Y_D$

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Introducing Foreign Trade

Typically, Canada’s export will not change as a result of changes in Canadian national income. We therefore treat exports, $X$, as autonomous expenditure.

Imports, however, depend on the spending decisions of Canadian households and firms.

$$ IM = mY $$

IM ⇒ Import

m ⇒ Marginal propensity to import

Y ⇒ GDP

Another way of expressing it:

So net exports can be written as such:

$$ NX = X - mY $$

<aside> 💡 Since desired imports rise when national income rises, net exports are inversely related to national income.

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Equilibrium National Income

We can make the following generalzation: