In an open economy (Rs crore), consumption is 500, investment is 200, government purchases are 100, exports are 150 and imports are 120. What are the domestic demand for goods and the demand for domestic goods?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs 800 crore and Rs 830 crore
Domestic demand for goods is what people at home spend, on home and foreign goods: C + I + G. Demand for domestic goods adds what foreigners buy from us and takes out what we buy from abroad: C + I + G + X − M.
Given:
C = 500
I = 200
G = 100
X = 150
M = 120 (Rs crore)
\( \displaystyle \text{Domestic demand for goods} = 500 + 200 + 100 = 800 \)
\( \displaystyle \text{Demand for domestic goods} = 800 + 150 - 120 = 830 \)
The two figures are Rs 800 crore and Rs 830 crore. They are two different things: imports are part of domestic demand that falls on foreign goods, and exports are demand for our goods from abroad.
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.” “National Income Identity for an Open Economy … 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 = C + I + G + X – M (6.3)” |