<p>I think you are overthinking it.</p>
<p>Based on my reading of the text it says that <strong>one way</strong> of modeling open economy is as:</p>
<p><span class="math-container">$$Y_1= C+I+G+(X-M).$$</span></p>
<p>And alternative to this way is to use model with:</p>
<p><span class="math-container">$$ Y_2 = C+I +G + (TR-TA).$$</span></p>
<p>However, the text <strong>does not</strong> seem to claim that <span class="math-container">$Y_1=Y_2$</span>. Hence you can't just substitute 1.8 into 1.7. The text is saying;</p>
<blockquote>
<p><strong>Including net exports is not enough</strong> for equilibrium in the balance of payment.</p>
</blockquote>

CC BY-SA 4.0
2024-05-07T23:32:06.497Z
2024-05-07T23:32:06.497Z
1muflon1
<p>&quot;<em>A total receipt comprises the capital flow and net exports. Similarly, the total payments comprises of the capital outflow and payment for import</em>.&quot;</p>
<p><span class="math-container">$TR = X +$</span> capital flows</p>
<p><span class="math-container">$TP = M +$</span> capital outflows</p>
<p>The open economics modelling <span class="math-container">$Y=C+I+G+X-M$</span> is a simplification. In reality, you would need to add all the Balance of Payment, i.e current account (roughly X-M), capital account (roughly nothing), and the financial account (capital inflows - capital outflows).</p>
<p>As the Balance of Payment is always equals to 0, current account balance (X-M) is equal to financial account balance. Apparently is the book you mention, the author takes everything into account in <span class="math-container">$TR$</span> and <span class="math-container">$TA$</span>, i.e the balance of total receipts (from exports and capital inflows) and total payments (imports and capital outflows).</p>

CC BY-SA 4.0
2024-06-07T14:00:01.730Z
2024-06-07T14:00:01.730Z
justaneconomist
<h2>I'm looking to brush up on my formal knowledge of economic theory and in reading Sanjay Rode's &quot;Advanced Macroeconomics&quot; (ISBN 978-87-403-0156-4) I've come across the following passage (pp 12-13):</h2>
<blockquote>
<p>In the modern world, all the economies are open economies and we
cannot neglect external sector. Foreign trade is a must in the
globalized world and it is increasing with increase in openness of a
country’s economy. Including these factors, it can be interpreted as
follows</p>
<p>Y= C + I + G + (X - M) (1.7) Where (X - M): Net exports to other countries</p>
<p>All governments encourage export and try to minimize imports. The aim
is to increase the foreign capital flow and reserves. Including net
exports is not enough for equilibrium in the balance of payment.
Capital flow is also taken into consideration. It can be interpreted
as</p>
<p>Y = C + I + G + (TR-TA) (1.8) Where TR: Total Receipts TA: Total
Payments</p>
<p>A total receipt comprises the capital flow and net exports. Similarly,
the total payments comprises of the capital outflow and payment for
import.</p>
</blockquote>
<p>My issue is that, if you combine equations 1.7 and 1.8, you get</p>
<p>X - M = TR - TA (1.9)</p>
<p>Which doesn't seem to make sense, as the entire purpose of introducing the concepts of total receipts and payments was to make a distinction between just net exports and net exports and capital flow. If you try to define total receipts (TR) as, say, net exports plus capital inflow (X - M + CI where CI is capital inflow) as the text implies, and interpret payment for import as the value of imports (M), then you get</p>
<p>X - M = X - M + CI - CO - M
CI - CO = M</p>
<p>Where CO is capital outflow. Which would imply that net capital inflow is equal to the value of imports (?). Not sure if I'm missing some nuance or not understanding a definition, or if this just isn't a reputable textbook. The latter seems likely based on the overall quality of the text to be honest.</p>

<macroeconomics>
Question about passage from Sanjay Rode's "Advanced Macroeconomics"
bishop-fish
# Question about passage from Sanjay Rode's "Advanced Macroeconomics"

(Asked by: username_0 on 2024-05-07)

## I'm looking to brush up on my formal knowledge of economic theory and in reading Sanjay Rode's "Advanced Macroeconomics" (ISBN 978-87-403-0156-4) I've come across the following passage (pp 12-13):

> In the modern world, all the economies are open economies and we
> cannot neglect external sector. Foreign trade is a must in the
> globalized world and it is increasing with increase in openness of a
> country’s economy. Including these factors, it can be interpreted as
> follows
>
> Y= C + I + G + (X - M) (1.7) Where (X - M): Net exports to other countries
>
> All governments encourage export and try to minimize imports. The aim
> is to increase the foreign capital flow and reserves. Including net
> exports is not enough for equilibrium in the balance of payment.
> Capital flow is also taken into consideration. It can be interpreted
> as
>
> Y = C + I + G + (TR-TA) (1.8) Where TR: Total Receipts TA: Total
> Payments
>
> A total receipt comprises the capital flow and net exports. Similarly,
> the total payments comprises of the capital outflow and payment for
> import.

My issue is that, if you combine equations 1.7 and 1.8, you get

X - M = TR - TA (1.9)

Which doesn't seem to make sense, as the entire purpose of introducing the concepts of total receipts and payments was to make a distinction between just net exports and net exports and capital flow. If you try to define total receipts (TR) as, say, net exports plus capital inflow (X - M + CI where CI is capital inflow) as the text implies, and interpret payment for import as the value of imports (M), then you get

X - M = X - M + CI - CO - M
CI - CO = M

Where CO is capital outflow. Which would imply that net capital inflow is equal to the value of imports (?). Not sure if I'm missing some nuance or not understanding a definition, or if this just isn't a reputable textbook. The latter seems likely based on the overall quality of the text to be honest.

**Tags:** macroeconomics

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## 2 answers

### Answer by username_1 on 2024-05-07. Score: 1

I think you are overthinking it.

Based on my reading of the text it says that **one way** of modeling open economy is as:

$$Y\_1= C+I+G+(X-M).$$

And alternative to this way is to use model with:

$$ Y\_2 = C+I +G + (TR-TA).$$

However, the text **does not** seem to claim that $Y\_1=Y\_2$. Hence you can't just substitute 1.8 into 1.7. The text is saying;

> **Including net exports is not enough** for equilibrium in the balance of payment.


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### Answer by username_2 on 2024-06-07. Score: 0

"*A total receipt comprises the capital flow and net exports. Similarly, the total payments comprises of the capital outflow and payment for import*."

$TR = X +$ capital flows

$TP = M +$ capital outflows

The open economics modelling $Y=C+I+G+X-M$ is a simplification. In reality, you would need to add all the Balance of Payment, i.e current account (roughly X-M), capital account (roughly nothing), and the financial account (capital inflows - capital outflows).

As the Balance of Payment is always equals to 0, current account balance (X-M) is equal to financial account balance. Apparently is the book you mention, the author takes everything into account in $TR$ and $TA$, i.e the balance of total receipts (from exports and capital inflows) and total payments (imports and capital outflows).


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