Question

Question 22 (15 marks) (a) Explain the difference between the demand for domestic goods and the domestic demand for goods. Explain why the demand for domestic goods curve (ZZ) has a different shape from the domestic demand curve (DD). (6 marks)

Answer 1

Answer

22 (a) Demand for domestic goods, and domestic demand for goods

The demand for domestic goods, and domestic demand for goods are two different concepts.

Demand for domestic goods: In an open economy, the countries are engaged in trading goods and services internationally.When a good is produced in a country, creates its demand both in the domestic economy and in the foreign economy or country, then it is called demand for that domestic good in an open economy. So the demand for domestic goods refers the demand for goods both by domestic consumers and foreign consumers. When we talk about demand for domestic goods, it will include exports of domestic goods and will subtract the value of imported goods,because the imported goods are produced abroad and are not domestic goods.

So, the equation for demand for domestic good(Z) will be;

Z = C + I + G + X - (M) * 1/$\epsilon$ , where '$\epsilon$' is the real exchange rate, i.e., price of domestic goods in relation to the price of foreign goods. So, ' 1/$\epsilon$' is the price of foreign goods in relation to the price of domestic goods.

In the above equation, 'C + I + G^' is the domestic demand for the good. With the domestic demand, the export(X) is included, which the foreign demand for the domestic good; and the value of imports in terms of domestic good(M/$\epsilon$) is excluded.

Domestic demand for goods: The domestic demand for goods is the demand for goods produced in domestic economy, and also abroad. If the income rises, then the domestic demand for goods also rises. So the domestic demand for goods is positively related to domestic income.

In a closed economy, the domestic demand for goods is the sum of consumption demand(C) by household sector, Investment demand(I) by private sector, and government investment and demand for goods and services(G), i.e.,  'C+I+G'. In an open economy, when the domestic country imports goods from abroad, the domestic demand also includes the import demand for goods(M). All the four variables, 'C', 'I', 'G', and 'M' are positively related to domestic income. So if income of the domestic economy rises, then the domestic demand for goods also rises.

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The shape of demand for domestic goods curve is different from the shape of domestic demand curve.

Demand China on Import output

'ZZ' is the demand for domestic goods curve, which is flatter than the domestic demand for goods curve 'DD'.

Demand -DD DEZ Import output

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