Chapter 31 - Open-Economy Macroeconomics: Basic Concepts

central bank prints

central bank prints

When the ________ large quantities of money, that money loses value both in terms of the goods and services it can buy and in terms of the number of other currencies it can buy.

31 1

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)

NCO

When capital flows out of the company, (________> 0) Saving, Investment and Their Relationship to the International Flows* Y= C + I + G + NX* Y- C- G= I + NX, so S= I + NX* Saving= Domestic investment + net capital outflow* In a closed economy, ________= 0 so S= I; saving equals investment* An open economy has two uses for saving money: domestic investment and net capital outflow* Saving, investment, and international capital flows are linked Summing Up* Trade Deficit* Exports <Imports* Net Exports <0* Y <C + I + G* Saving <Investment* Net Capital Outflow <0* Balanced Trade* Exports= Imports* Net Exports= 0* Y= C + I + G* Saving= Investment* Net Capital Outflow= 0* Trade Surplus* Exports> Imports* Net Exports> 0* Y> C + I + G* Saving> Investment* Net Capital Outflow> 0 31- 2 The Prices for International Transactions: Real and Nominal Exchange Rates Nominal Exchange Rates* 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* When a currency appreciates, it strengthens.

Closed economy

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

Imports

_____________: goods and services produced abroad and sold domestically

Exports

_____________: goods and services produced domestically and sold abroad

The Flow of Goods

__________________: Exports, Imports, and Net Exports

Open economy

_____________: an economy that interacts freely with other economies around the world

Trade balance

_____________: the value of a nation’s exports minus the value of its imports, also called net exports

Balanced trade

________: a situation in which exports equal imports

Trade deficit

_____________: an excess of imports over exports

Trade surplus

______________: an excess of exports over imports

Law of one price

______________-: a good must sell for the same price in all locations, otherwise there would be opportunities for profit left unexploited

Arbitrage

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