28

28 Aggregate planned expenditure (Y) = 13,500

Autonomous consumption = 600

MPC = 0.8

Government purchase (G) = 2,700

Taxes = 2,500

Planned Investment (I) = 2,900

Consumption function (C) = Autonomous consumption + MPC * (Y - Tax) = 600 + 0.8 * (13,500 - 2,500) = 9,400

Aggregate planned expenditure = C + I + G + Net Exports

13,500 = 9,400 + 2,900 + 2,700 + Net Exports

Net Exports = -1,500

29 United States has a comparative advantage in the production of sprcialised capital intensive goods that require technical know how. Mostly it exports capital goods, automobiles, and chemicals. This is because the US has relatively costly labour and high capital and knowledge based resources. This means that the relative efficiency in the production of capital goods is greater in the US compared to other countries. This is based on the theory of comparative advantage given by Ricardo. Suppose there are two goods, automobiles and rice. Suppose US can produce either 5 cars or 10 units of rice while China can produce either 2 cars or 8 units of rice with all its available resources. The opportunity cost of producing an additional unit of car is 2 units of rice in the US and 4 units of rice in China. Therefore, the US has to give up less units of rice to produce an additional car, and has a comparative advantage in producing cars. That is why US will specialize in production of cars and export cars.