# 发展经济学的高级课题 Advanced Topics in Development Economics ECON61212T

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The gross national product of our economy is defined as the money value of all final products (goods and services) produced in a period of time, usually a year. This product can be divided into two categories, consumption $(C)$ and investment (I). Thus we have the following definitional equation:
$$Y=C+I$$
where $Y$ stands for GNP.
In the production of goods and services making up the GDP, an equal amount of income is generated in the form of wages, rent, interest, and profit. All income earned is either spent for consumption or saved. Thus we have another definitional relation to state the disposition of income:
$$Y=C+S$$
Setting equations ( 1$)$ and ( 2 ) equal to each other, we obtain:
$$C+S=Y=C+1$$
and thus
$$C+S=C+I$$

## ECON61212T COURSE NOTES ：

$$S=I+(X-M)$$
In Chapter 12 we observed that the balance of trade in goods and services $(X-M)$ is equal to the change in the home country’s net creditor/debtor position relative to the rest of the world, which can also be regarded as net foreign investment. ${ }^{1}$ Consequently, the familiar identity between saving and investment still holds, with investment including both domestic and foreign investment. That is:
$$S=I_{d}+I_{f} \text { where } I_{f}=X-M$$
Now we are ready to explain how income is determined in an open economy. We assume that exports, like investment, are exogenous – that is, the level of exports does not depend on domestic income. Imports, on the other hand, are a function of income: an increase in income leads to an increase in imports. This gives us a relationship (an import function) such as the following:
$$\mathrm{M}=m Y$$
where $m$ represents the “marginal propensity to import,” the fraction of additional income that is spent for imports. That is:
$$m=\frac{\Delta \mathrm{M}}{\Delta \mathrm{Y}}$$