The Open Economy - 3a

What is the key difference/ effect between an open and closed economy

Can import/ export of course but also spending does not always equal output of goods and services as a result

What is the relation of national income and investments with exports/ imports

Saving - investment = NX

How can S>I and vice versa in an open economy

The country is lending the excess to foreigners

Or vise versa the economy finances the additional investment by investing using foreign savings from abroad

What does capital inflow mean

Our economy uses foreign savings to fuel investment

What does a trade deficit mean for our economy on the financial markets

That we are a net borrower on the financial markets

What is a bilateral trade balance

The trade balance between two countries

What determines the world interest rate

The world economy is a large closed economy

Equilibrium of saving and investment determines the world interest rate

Draw a diagram showing world interest rate and the level of saving and investment

What is the nominal exchange rate

The price at which you can swap one currency for another

What is the real exchange rate

The relative price of one good in two different countries

How is the real exchange rate calculated

Real exchange rate = nominal e rate * (price level in country 1/ price level in country two

Draw a graph showing the relationship between real exchange rate and net exports

What policies can protect domestic industries

Tariffs - upping the price of imports

Quotas - restricting quantity of imports

What effect do protectionist policies have of NX

Why

No change in NX - only quantity of trade and demand for exports

Real interest rate increase leading to our imports becoming less attractive to other countries and that fact that S - I is unchanged so there is no change