BC103 CH13: Open-economy macroeconomics: basic concepts

Economics

closed economyeconomy that does not interact with other economies around the world

closed economy

economy that ineracts freely with other economies around the world;

open economy

exports are greater than imports; the country sells more G&S than it buys from other countries

trade surplus

imports are greater than exports; the country sells fewer G&S abroad than it buys from other countries

trade deficit

a situation in which exports equal imports; country’s net exports are zero

balanced trade

What are 6 factors that might influence a country’s exports, imports, and net exports?

Consumer tastes for goods, prices of goods home and abroad, exchange rates (domestic currency to buy foreign currencies, incomes, costs of transporting goods, govt policies toward international trade

purchase of foreign assets by domestic residents

net capital outflow (net foreign investment)

What are 4 variables that influence net capital outflow?

real interest rates paid on foreign and domestic assets, perceived economic and political risks of holding assets abroad, govt policies that affect foreign ownership of domestic assets

imbalance between a country’s exports and imports

net exports (NX)

imbalance between the amount of foreign assets bought by domestic residents and amount of DOMESTIC assets bought by FOREIGNERS

net capital outflow (NCO)

Net capital outflow (NCO)= Net exports (NX)

identity; every transaction that affects one side of this equation affects the other side by the same amount

When a nation is running a trade surplus (NX > 0)…

it is selling more goods and services to foreigners than it is buying from them

When a country uses foreign currency it receives from the net sale of goods and services abroad to buy foreign assets…

Capital is flowing out of the country (NCO > 0)

When NX <0 (trade deficit)

a country is buying more goods and services from foreigners

If a country is selling assets abroad to finance the net purchases in world markets…

Capital is flowing into the country (NCO < 0)

Y= C + I + G + NX

Open economy; aka the GDP

S= Y [total income] - C [private consumption] - G [govt consumption]

National savings; is equal to i+NX

S = I + NX

Saving= domestic investment + net capital outflow

rate at which a person can trade currency of one country for currency of another; ex) 80 yen per dollar

nominal exchange rate

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

appreciation

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

depreciation

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

real exchange rate

Depreciation in the US real exchange rate means

US goods are cheaper relative to foreign goods; all consumers buy more US goods and fewer goods from other countries

in appreciation in the US real exchange rate means

US goods are more expensive compared to foreign goods; lower exports, higher imports