354
MACROECONOMICS
How is it that the preferred consumption and investment is possible? After all,
the consumption in period 1 is OH, and investment is
GF
(
K
0
) and consump-
tion plus investment exceeds GDP as given by
OF
(
K
0
)
.
This is made possible
by borrowing from abroad. In the current period, the economy runs a trade
balance deficit equal to GH. That trade deficit is paid back in the subsequent
period at interest rate
r
.
Distance GL represents the second-period consumption. Distance KL is the
portion of the second-period output (BG) that is used to repay the first-period
consumption [given by the distance
F ...
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