Explain how is equilibrium output determined in an open economy?

Question

23 Apr 2024

Answer :

Word Count : 354

In an open economy, equilibrium output is determined by the interaction of aggregate demand (AD) and aggregate supply (AS) within the framework of international trade and capital flows. Here's how it works:

1. Aggregate Demand (AD): AD represents the total demand for goods and services within an economy at a given price level. In an open economy, AD includes not only domestic consumption, investment, government spending, and net exports, but _______ _____ ______ _____ __________ __________ ________.
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Particulars		Rs. in crores
(i)	Compensation of employees	2000
(ii)	Rent and interest	800
(iii)	Indirect taxes	120
(iv)	Corporation tax	460
(v)	Consumption of fixed capital	100
(vi)	Subsidies	20
(vii)	Dividend	940
(viii)	Undistributed profits	300

(ix)	Net factor income from abroad	150
(x)	Mixed Income	200