Which of the following statements are correct?
(A) In a closed economy, the sources of demand for domestic goods are consumption, investment and government spending.
(B) In an open economy, exports are an additional source of demand for domestic goods.
(C) Imports are a part of the demand for domestic goods.
(D) The national income identity for an open economy is Y + M = C + I + G + X.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
Demand for domestic goods comes from our own spending and from foreigners. Imports are spending that falls on foreign goods.
(A) In a closed economy, the sources of demand for domestic goods are consumption, investment and government spending. — Correct. These are the three sources: C, I and G.
(B) In an open economy, exports are an additional source of demand for domestic goods. — Correct. Foreigners buying our goods add to demand.
(C) Imports are a part of the demand for domestic goods. — Incorrect. Imports are the part of domestic demand that falls on foreign goods.
(D) The national income identity for an open economy is Y + M = C + I + G + X. — Correct. This is equation (6.2); rearranged, it gives Y = C + I + G + X − M.
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)” |