Mathematical Analysis of National Income Determination: An Academic Guide

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This paper provides a mathematical analysis of national income determination for a small open economy. The authors derive analytical conditions for determining the equilibrium level of domestic income, real exchange rate, and the proportion of domestic production exported. In order to illustrate the model, two different exchange rate regimes, the flexible and the fixed exchange rate regime, are discussed. The analysis provides a comprehensive insight into the relationships among economic variables-such as consumption, investment, import and export-and their effects on overall national income. The results show that the impact of economic variables on national income depends on the regime of the exchange rate. This paper offers policy makers a deeper understanding of the consequences of exchange rate policies on national income and provides important insights for countries wishing to maintain macroeconomic stability.