Correct Option (C)
In an open economy, national income (Y) is determined by the aggregate expenditure within the economy. This aggregate expenditure comprises domestic spending and net foreign spending. Domestic spending includes consumption (C), investment (I), and government expenditure (G). Net foreign spending is represented by net exports, which is the difference between total exports (X) and total imports (M). Therefore, the national income identity for an open economy is Y = C + I + G + (X - M).
Incorrect Options:
Option A: Y = C + I + G + X. This equation incorrectly includes total exports (X) without accounting for total imports (M). In an open economy, imports represent spending on foreign goods and services, which reduces the domestic component of aggregate demand and thus must be subtracted to arrive at net exports.
Option B: Y = C + I + G - X + M. This equation incorrectly subtracts exports (X) and adds imports (M). The correct formulation for net exports involves subtracting imports from exports (X - M), as imports represent a leakage from the domestic circular flow of income.
Option D: Y = C + I - G + X - M. This equation incorrectly subtracts government expenditure (G). Government expenditure is a component of aggregate demand and contributes to national income, similar to consumption and investment. Therefore, it should be added, not subtracted.