Open economy national income identity
Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
The open economy national income identity shows how output is used in an economy that trades with other countries: Y + M ≡ C + I + G + X, or Y ≡ C + I + G + NX, where NX = X − M. Here Y is GDP, C is consumption, I is investment, G is government spending, X is exports, M is imports and NX is net exports. Total supply (domestic output plus imports) equals total final use at home and abroad. It is an identity (≡), which means it holds by definition for every value, not just for some values.
Example
In India in 2024-25 (Provisional Estimates, at constant 2011-12 prices), exports were ₹40.68 lakh crore and imports were ₹42.29 lakh crore. So NX was −₹1.61 lakh crore, which slightly reduced GDP compared with domestic spending (C + I + G).
Don't confuse with
- Closed economy identity (Y = C + I + G): this leaves out foreign trade. In an open economy, imports must be subtracted because C, I and G include spending on foreign goods.
Related concepts
- Expenditure method
- Final expenditure
- Private Final Consumption Expenditure
- Government Final Consumption Expenditure
- Gross Fixed Capital Formation
- Valuables
- Statistical discrepancy
- Income method
- Functional distribution of income