Macroeconomic Theory of the Open Economy Flashcards

A set of vocabulary flashcards covering the key concepts and identities of open economy macroeconomics, based on Mankiw's Principles of Macroeconomics, 10th Edition.

Market for Loanable Funds

A market in which the real interest rate ($r$) adjusts to balance the supply (from national saving) and the demand (from domestic investment and net capital outflow).

Demand for Loanable Funds

In an open economy, this consists of the sum of domestic investment ($I$) and net capital outflow ($NCO$).

Supply of Loanable Funds

A component of the loanable funds market derived from national saving ($S$).

Net capital outflow ($NCO$)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. It depends negatively on the real interest rate ($r$).

Market for foreign-currency exchange

A market in which holders of local currency trade for foreign currencies, where the real exchange rate ($E$) adjusts to balance the supply of dollars (from $NCO$) and the demand for dollars (from $NX$).

Identity for National Saving

The macro identity expressed as $S = I + NCO$, where saving equals domestic investment plus net capital outflow.

Identity for Foreign-Currency Exchange

The macro identity expressed as $NCO = NX$, where net capital outflow equals net exports.

Real exchange rate ($E$)

The measure of the quantity of foreign goods and services that trade for one unit of U.S. goods and services; it is the price that balances supply and demand in the foreign-currency exchange market.

Demand for dollars

In the foreign-exchange market, this is driven by net exports ($NX$), as foreigners need dollars to buy U.S. goods and services.

Supply of dollars

In the foreign-exchange market, this is driven by net capital outflow ($NCO$), as U.S. residents sell dollars to obtain foreign currency for buying foreign assets.

Twin Deficits

A phenomenon where the federal budget deficit and the trade deficit (net exports) often move in opposite directions, as a budget deficit reduces saving and leads to a trade deficit.

International Investment Position of the U.S. (June 28, 2022)

The U.S. net debt was $\$17.75\text{ trillion}$, calculated from foreign-owned U.S. assets ($\$51.75\text{ trillion}$) minus U.S.-owned foreign assets ($\$34.00\text{ trillion}$).

Trade policy

A government policy that directly influences the quantity of goods and services a country imports or exports, such as a tariff or import quota.

Tariff

A tax on imported goods.

Import quota

A limit on the quantity of imports allowed into a country.

Capital flight

A large and sudden reduction in the demand for assets located in a country, often caused by political instability, leading to higher interest rates and currency depreciation.