In a closed economy, aggregate demand is C + I + G. In an open economy, the demand for domestic goods differs from the domestic demand for goods (C + I + G) by:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → net exports (X − M)
Domestic demand for goods is C + I + G, spent by our own people. Demand for domestic goods adds exports, which foreigners buy from us, and takes away imports, which we buy from abroad.
So the two differ by X − M, which is net exports: Y = C + I + G + NX.
This question uses Determination of Income and Employment and Open Economy Macroeconomics together.
NCERT (2026-27): “DETERMINATION OF EQUILIBRIUM INCOME IN OPEN ECONOMY With consumers and firms having an option to buy goods produced at home and abroad, we now need to distinguish between domestic demand for goods and the demand for domestic goods.” “… 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)” “… 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. …” |