VOTING PARADOX: The observation that voting by a relatively small group of people might generate a intransitive or inconsistent ranking of three or more alternatives, creating a paradox of rankings. The preferences of rational individuals are generally assumed to transitive and consistent, that is, if a person prefers A to B and B to C, then the person also prefers A to C. However, the preferences of group of voters might not be consistent. That is, as a group, voters might prefer A to B and B to C, but then prefer C to A. This is not only paradoxical and confusing, it also can be inefficient.
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INDUCED NET EXPORTS:
Net exports by the foreign sector that depend on income or production (especially national income and gross domestic product). That is, changes in income induce changes in net exports. Induced net exports reflect the induced relation between imports and income, which means net exports decline as income increases. They are measured by the negative of the marginal propensity to import (MPM) and are reflected by the negative slope of net exports line. The alternative to induced net exports is autonomous net exports, which do not depend on income. Induced net exports',500,400)">net exports are net exports by the foreign sector that are based on the level of income or production. This is one of two basic classifications of net exports. The other is autonomous net exports, net exports that are NOT based on the level income or production. In other words, net exports can be divided into: (1) expenditures on final goods which are undertaken by the foreign sector regardless of the level of aggregate production and (2) an adjustment of expenditures (more or less) that results because aggregate production and income changes.
Net exports are commonly assumed to be totally autonomous in the introductory analysis of Keynesian economics. That is, any induced net exports that might realistically exist are ignored. Doing so not only simplifies the analysis, but also places the focus on how and why autonomous net exports change, and how such changes affect the macroeconomy. More sophisticated, and realistic, analysis then includes induced net exports.
Induced net exports are reflected by the slope of the net exports line, which is the negative of the marginal propensity to import (MPM). This negative value of the MPM thus enters into the slope of the aggregate expenditures line',500,400)">aggregate expenditures line which then affects the value of the expenditures multiplier, as well.
Exports Minus ImportsNet exports are the difference between exports and imports, or exports minus imports. Exports are goods produced by the domestic economy and purchased by the foreign sector. Imports are goods produced by the foreign sector and purchased by the domestic economy (that is, the domestic household, business, and government sectors).
The amount of exports sold to the foreign sector is theoretically and realistically unaffected by the level of domestic income or production. That is, exports are totally autonomous. They are affected by what transpires in the foreign sector not in the domestic economy. For example, an increase in U.S. national income is NOT going to induce a change in exports.
In contrast the amount of imports purchased from the foreign sector is induced by the level of domestic income and production. A major component of induced imports is induced consumption. That is, imports are actually part of the consumption expenditures undertaken by the household sector. When the household sector receives more income, then (based on the fundamental psychological law), it increases consumption expenditures. Some of these expenditures are for domestic production and some for imports. More income, means more of both types.
Of course, imports also consist of investment expenditures by the business sector and government purchases by the government sector. Both of these are induced by income and production, as well. And both of these are used to purchase both domestic production and imports.
Hence, imports are induced by income and production. However, because imports are subtracted from exports to derive net exports, an income induced increase in imports means a decrease in net exports.
Induced: An EquationOne way to provide an illustration of induced net exports (and the relation to autonomous net exports) is with a general linear net exports equation, such as the one presented here:where: NX is net exports, Y is income (or aggregate production), m is the intercept, and n is the slope.
As with any linear equation, the two key parameters that characterize this net exports equation are slope and intercept. Induced net exports are indicated by the slope of the net exports equation. Autonomous net exports are then indicated by the intercept.
- An Induced Slope: The slope of the net exports equation (n) measures the change in net exports resulting from a change in income. If income changes by $1, then net exports change by $n. This slope is generally assumed and empirically documented to be less than zero, but greater than negative one (-1 < n < 0). Because imports are induced and exports are not, this slope is actually the negative of the value of the marginal propensity to import (MPM), or negative induced imports.
- An Autonomous Intercept: The intercept of the net exports equation (m) measures the amount of net exports undertaken if income is zero. If income is zero, then net exports is $m. The intercept is generally assumed and empirically documented to be positive (0 < m). It is conceptually identified as autonomous net exports. This is the difference between autonomous exports and autonomous imports.
Induced: A Line
Another common way to identify induced net exports is with a net exports line, such as the one presented in the exhibit to the right. The red line, labeled X-M in the exhibit, indicates net exports, the difference between exports and imports. The negative slope of this line indicates induced net exports and the vertical intercept indicates autonomous net exports.
|Net Exports Line
The red line, labeled X-M in the exhibit, is the negatively-sloped net exports line for the equation: NX = 1 - 0.075Y. This line indicates that greater levels of income induce fewer net exports.
Because net exports are the difference between exports and imports, this line can be divided into its two component parts--exports and imports.
When all is said and done, and when imports are subtracted from exports, the net exports line is negatively sloped. A click of the [Net Exports] button returns the original net exports line. The net exports line in this case reflects autonomous net exports as the intercept, which is positive autonomous exports, and induced net exports, which is negative induced imports.
- Autonomous Exports: A click of the [Autonomous Exports] button demonstrates the first component. Because exports depend on activity in the foreign sector and not the domestic economy, exports are autonomous--completely and totally. Hence the exports line is horizontal, with a zero slope. Autonomous exports are equal to $1 trillion at every level of domestic income and production.
- Induced Imports: A click of the [Induced Imports] button demonstrates the second component. The resulting red imports line is positively sloped, with the slope being induced imports. In this case, autonomous imports happen to be zero as the imports line emerges from the origin. But autonomous imports could just as easily be a positive amount.
Other Induced ExpendituresNet exports are one of several induced expenditures. The other three aggregate expenditures--consumption expenditures, government purchases, and net exports--are also induced by income and production.
Other components of the macroeconomy are also related to, or induced by, income and production. An important one is saving, which is the other side of consumer behavior. Consumption and saving are both induced by income. The psychological law states that an increase in income is used both for extra consumption and extra saving. A second induced part of the macroeconomy is taxes. In particular, sales and income taxes are directly related to income. More income invariably means more taxes. Another is the demand for money. Because expenditures use money, an increase in income not only induces expenditures, it also induces the demand for money.
- Consumption is unquestionably the most important induced expenditure. It is not only the largest of the four aggregate expenditures, but it is also the most induced of the four. It captures the fundamental psychological law and triggers the largest change in expenditures resulting from a change in income or production.
- Investment is induced by income because an expanding economy generally boosts business profit, which is then used for investment expenditures on capital goods.
- Government purchases are induced by income and production because extra income generates more tax revenue (especially state and local tax revenue), which is then used by government to finance expenditures.
INDUCED NET EXPORTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 4, 2024].
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