Mankiw, Cha. 18 - Open-Economy Macroeconomics: Basic Concepts

closed economy

an economy that does not interact with other economies in the world.

open economy

an economy that interacts freely with other economies around the world.

exports

goods produced domestically and sold abroad.

imports

goods produced abroad and sold domestically.

next exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).

trade balance

the value of a nation’s exports minus the value of its imports

• -*(another name for net exports)

trade surplus

an excess of exports over imports.

trade deficit

an excess of imports over exports.

balanced trade

a situation in which exports equal imports.

net capital outflow

the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

True!

True/False: For an economy as a whole, net capital outflow equals net exports.

1). S = Y - C - G » 2). S = I + NX » 3). S = I + NCO (net capital outflow).

formulas for domestic saving (S):

nominal exchange rate

the rate at which a person can trade the currency of one country for the currency of another.

appreciation

an increase in the value of a currency as measured by the amount of foreign currency it can buy.

depreciation

a decrease in the value of a currency as measured by the amount of foreign currency it can buy.

exchange-rate index

turns many exchange rates into a single measure of a currency’s international value.

real exchange rate

the rate at which a person can trade the goods and services of one country for the goods and services of another.

real exchange rate = (nominal exchange rate x domestic price) / foreign price

real exchange rate formula:

purchasing-power parity

a theory of exchange rates that says a unit of any given currency should be able to buy the same quantity of goods in all countries.

law of one price

asserts that a good must sell for the same price in all locations.

arbitrage

the process of taking advantage of price differences for the same item in different markets.

dollar price - foreign price x exchange rate

• -*(exchange rate = U.S. dollar rate / 1 foreign currency)

dollar-price formula:

PPP exchange rate = U.S. price / foreign price

purchasing-power parity (PPP) exchange rate formula: