Which of the following gives aggregate demand for domestic goods in an open economy?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Consumption + Investment + Government expenditure + Net exports
In an open economy, exports add to demand for domestic goods, while imports take demand away to foreign goods. So aggregate demand for domestic goods is C + I + G + net exports (X − M).
Option (1) Consumption + Investment + Government expenditure — Incorrect. This is demand in a closed economy.
Option (2) Consumption + Investment + Government expenditure + Imports — Incorrect. Imports are spending on foreign goods, so they are subtracted.
Option (3) Consumption + Investment + Government expenditure + Exports + Imports — Incorrect. Exports are added but imports must be subtracted.
Option (4) Consumption + Investment + Government expenditure + Net exports — Correct. Net exports = exports − imports.
NCERT (2026-27): “National Income Identity for an Open Economy In a closed economy, there are three sources of demand for domestic goods – Consumption (C ), government spending (G ), and domestic investment (I ). We can write Y = C + I + G (6.1) In an open economy, exports (X ) constitute an additional source of demand for domestic goods and services that comes from abroad and therefore must be added to aggregate demand. Imports (M ) supplement supplies in domestic markets and constitute that part of domestic demand that falls on foreign goods and services. Therefore, the national income identity for an open economy is Y + M = C + I + G + X (6.2) Rearranging, we get Y = C + I + G + X – M (6.3) or Y = C + I + G + NX (6.4)” “National Income Identity for an Open Economy … where, NX is net exports (exports – imports). A positive NX (with exports greater than imports) implies a trade surplus and a negative NX (with imports exceeding exports) implies a trade deficit. …” |