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 ________ The International Flows of Goods and Capital The Flow of Goods: Exports, Imports, and Net Exports* Exports: goods and services produced domestically and sold abroad* Imports: goods and services produced abroad and sold domestically* Net exports: the value of a nations exports minus the value of its importance, also called the trade balance* Net exports= Value f countrys exports- Value of countrys imports* Trade balance: the value of a nations exports minus the value of its imports, also called 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* Influencers working against exports, imports, and net exports* Consumer tastes* Prices of goods at home and abroad* Exchange rates* Incomes of consumers* Costs of transportation of products* Government policies The Flow of Financial Resources: Net Capital Outflow* Net capital outflow: the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners* Purchase of foreign assets by domestic residents- Purchase of domestic assets by foreigners* Often called the net foreign investment, net capital outflow can be positive or negative* Variables that might influence net capital outflow:* The real interest rates paid on foreign assets* The real interest rates paid on domestic assets* The perceived economic and political risks of holding assets abroad* The government policies that affect foreign ownership of domestic assets The Equality of Net Exports and Net Capital Outflow* NCO= NX* Net capital outflow= Net exports* The equation is an identity* A trade surplus (NX> 0)
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