The equilibrium level of national income in an open economy is given by:
A)I + X = S + M
B)X - M = S - I
C)I + (X-M)= S
D)all of the above

Question

Quizplus · Accepted Answer

All three equations are equivalent representations of the equilibrium level of national income in an open economy where I represents investment, X represents exports, S represents savings, and M represents imports. Each equation is based on the principle of national income accounting, where total output (Y) equals total expenditures (C + I + G + NX) in an economy. In an open economy, the total expenditures include both domestic- and foreign-induced expenditures (NX).

Equation A) I + X = S + M represents the equality of total domestic investments and exports with total domestic savings and imports plus foreign savings.

Equation B) X - M = S - I represents the equality of net exports (exports minus imports) with the difference between domestic savings and investments.

Equation C) I + (X-M) = S represents the equality of total domestic investments and the sum of domestic savings and net exports.

Therefore, all three equations are valid and provide equivalent representations of the equilibrium level of national income in an open economy.

The Equilibrium Level of National Income in an Open Economy