With foreign trade exports of a country add to the aggregate expenditure on domestic output. The imports, however, constitute that part of domestic expenditure which is not spent upon domestic output but goes to producers in the foreign countries. Thus, while exports make an injection in expenditure on national output, imports constitute a leakage out of it. Thus, aggregate expenditure equation in the open economy becomes
AE = C + I + G + (X – M)
and
GDP = AE = C + I + G + (X - M).
