Question

Help please? I just need to know how to do this, it's practice for an exam. Thanks!

Consider the following exchange:

I don’t know why people refuse to acknowledge this point

“Our deficit hurts our economy”

“No it doesn’t”

“What’s the formula for GDP”

“GDP =C + I + G + (X – M)”

“Lowering M increases GDP. It’s math”

1. How would you respond to the exchange above as an economist? Be specific and clear when crafting your response. Explain your answer as if you were teaching a friend that has never learned about GDP.
2. How would you change the accounting identify so that it makes more sense to people? Explain your change and why it is clearer than the textbook identity for GDP.

Answer 1

If we consider open economy model, trade restrictions do not affect the net export.

following is diagram:

If government imposes trade restrictions, Net export shifts to right, thereby pulling up exchange rate of economy, Rise in exchange rate will discourage export or it renders export less competitive.

If through the trade restrictions, government reduces the import, the export automatically get reduced. so there is no net effect.

GDP =C + I + G + (X – M)

her both X and M falls, and it does not affect GDP of country.