Assuming investment (I) and government purchases (G) are zero, then the basic model of an open economy (where C = consumer spending; S = saving; T = taxes; X - M = exports - imports; and Q = GDP) is:

Question

Quizplus · Accepted Answer

When investment and government purchases are zero, the only components left in the GDP equation are consumption (C) and net exports (exports - imports, or X - M). Therefore, we can rearrange the equation to be Q = C + X - M, or Q - C = X - M.

Assuming Investment (I) and Government Purchases (G) Are Zero, Then