1、Open-Economy Macroeconomics:Basic Concepts1 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Basi
2、c Concepts Closed economyEconomy that does not interact with other economies in the world Open economyEconomy that interacts freely with other economies around the world2 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted
3、 in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flow of Goods ExportsGoods&servicesProduced domesticallySold abroad ImportsGoods and servicesProduced abroadSold domestically3 2011 Cengage Learning.All Rights Res
4、erved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flow of Goods Net exportsValue of a nations exports Minus the value of
5、 its importsAlso called trade balance Trade balanceValue of a nations exportsMinus the value of its importsAlso called net exports4 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certai
6、n product or service or otherwise on a password-protected website for classroom use.International Flow of Goods Trade surplusExcess of exports over imports Trade deficitExcess of imports over exports Balanced tradeExports equal imports5 2011 Cengage Learning.All Rights Reserved.May not be copied,sca
7、nned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flow of Goods Factors that influence a countrys exports,imports,and net exports:Tastes of consume
8、rs for domestic&foreign goodsPrices of goods at home and abroadExchange ratesPeople use domestic currency to buy foreign currenciesIncomes of consumers at home and abroad6 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitte
9、d in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flow of Goods Factors that influence a countrys exports,imports,and net exports:Cost of transporting goods from country to countryGovernment policies toward inter
10、national trade7 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.The increasing openness of the U
11、.S.economy Increasing importance of international trade and finance1950s,imports and exports:4-5%of GDPRecent years:Exports increased more than twice Imports increased more than three times8 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except
12、for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.The increasing openness of the U.S.economy Increase in international tradeImprovements in transportationAdvances in telecommunicationsTechnological progress
13、Governments trade policies NAFTA GATT9 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Figure 11
14、0 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.The Internationalization of the U.S.EconomyThi
15、s figure shows exports and imports of the U.S.economy as a percentage of U.S.gross domestic product since 1950.The substantial increases over time show the increasing importance of international trade and finance.International Flow of Capital Net capital outflow Purchase of foreign assets by domesti
16、c residentsForeign direct investmentForeign portfolio investmentMinus the purchase of domestic assets by foreigners11 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or s
17、ervice or otherwise on a password-protected website for classroom use.International Flow of Capital Variables that influence net capital outflowReal interest rates paid on foreign assetsReal interest rates paid on domestic assetsPerceived economic and political risks of holding assets abroadGovernme
18、nt policies that affect foreign ownership of domestic assets12 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for
19、 classroom use.Net Exports=Net Capital Outflow Net exports(NX)Imbalance between a countrys exports and its imports Net capital outflow(NCO)Imbalance betweenAmount of foreign assets bought by domestic residentsAnd the amount of domestic assets bought by foreigners Identity:NCO=NX13 2011 Cengage Learn
20、ing.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Net Exports=Net Capital Outflow When NX 0(trade surplus)Selling mo
21、re goods and services to foreigners Than it is buying from themFrom net sale of goods and servicesReceives foreign currencyBuy foreign assetsCapital-flowing out of the country:NCO 014 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use
22、 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Net Exports=Net Capital Outflow When NX 0(trade deficit)Buying more goods and services from foreignersThan it is selling to themThe net purchase of goods and servic
23、esNeeds financedSelling assets abroadCapital-flowing into the country:NCO Imports Net exports 0 Y Domestic spending(C+I+G)S I NCO 017 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a cert
24、ain product or service or otherwise on a password-protected website for classroom use.International Flows Trade deficit:Exports Imports Net exports 0 Y Domestic spending(C+I+G)S I NCO 018 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for
25、 use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flows Balanced trade:Exports=Imports Net exports=0 Y=Domestic spending(C+I+G)S=I NCO=019 2011 Cengage Learning.All Rights Reserved.May not be copi
26、ed,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Table 120 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or i
27、n part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.International Flows of Goods and Capital:SummaryThis table shows the three possible outcomes for an open economy.Is the U.S.trade deficit a nat
28、ional problem?Past two decadesBorrowed heavily in world financial marketsTo finance large trade deficits Before 1980National saving&domestic investment were closeSmall net capital outflow21 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except f
29、or use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Is the U.S.trade deficit a national problem?After 1980National saving-fell substantially below investmentNet capital outflow-a large negative numberCapital in
30、flowU.S.-going into debt22 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Is the U.S.trade defi
31、cit a national problem?Changes in capital flowsArise from changes in savingArise from changes in investment 1980 to 1987Increase flow of capital(from 0.5 to 3.6%of GDP)Decline in national saving of 2.6 percentage points Decline public savingIncrease in government budget deficit23 2011 Cengage Learni
32、ng.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Is the U.S.trade deficit a national problem?1991 to 2000Increase fl
33、ow of capital(from 0.5 to 3.9%of GDP)Saving increased Budget surplusInvestment increased from 13.4 to 17.7%of GDP24 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or ser
34、vice or otherwise on a password-protected website for classroom use.Is the U.S.trade deficit a national problem?2000 to 2006Increase in capital flow(to 5.7%o GDP)Investment boom abatedBudget deficitsNational saving-fell to extraordinarily low levels 2007 to 2009,Trade deficit shrank Substantial decl
35、ine in housing pricesDeep recessionDramatic fall in investment25 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website f
36、or classroom use.Is the U.S.trade deficit a national problem?Trade deficit induced by a fall in savingThe nation is putting away less of its income to provide for its futureNo reason to deplore the resulting trade deficits Better to have foreigners invest in the U.S.economy than no one at all26 2011
37、 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Is the U.S.trade deficit a national problem?Trade de
38、ficit induced by an investment boomEconomy is borrowing from abroad to finance the purchase of new capital goods For good return on investment-the economy should be able to handle the debts that are being accumulated For lower return on investment-debts will look less desirable27 2011 Cengage Learni
39、ng.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Figure 228 2011 Cengage Learning.All Rights Reserved.May not be cop
40、ied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.National Saving,Domestic Investment,and Net Capital OutflowPanel(a)shows national saving and domestic in
41、vestment as a percentage of GDP.You can see from the figure that national saving has been lower since 1980 than it was before 1980.This fall in national saving has been reflected primarily in reduced net capital outflow rather than in reduced domestic investment.Figure 229 2011 Cengage Learning.All
42、Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.National Saving,Domestic Investment,and Net Capital OutflowPanel(b)shows n
43、et capital outflow as a percentage of GDP.You can see from the figure that national saving has been lower since 1980 than it was before 1980.This fall in national saving has been reflected primarily in reduced net capital outflow rather than in reduced domestic investment.Real&Nominal Exchange Rates
44、 Nominal exchange rateRate at which a person can trade currency of one country for currency of another Appreciation(strengthen)Increase in the value of a currencyAs measured by the amount of foreign currency it can buyBuy more foreign currency30 2011 Cengage Learning.All Rights Reserved.May not be c
45、opied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Real&Nominal Exchange Rates Depreciation(weaken)Decrease in the value of a currencyAs measured by the
46、amount of foreign currency it can buyBuy less foreign currency 31 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website
47、for classroom use.Real&Nominal Exchange Rates Real exchange rateRate at which a person can trade goods and services of one countryFor goods and services of another32Real exchange rateNominal exchange rate Domestic priceForeign price 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned
48、,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Real&Nominal Exchange Rates Real exchange rate=(e P)/P*Using price indexes e nominal exchange rate between the U.S.
49、dollar and foreign currencies P price index for U.S.basket P*price index for foreign basket33 2011 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a
50、 password-protected website for classroom use.Real&Nominal Exchange Rates Depreciation(fall)in the U.S.real exchange rateU.S.goods-cheaper relative to foreign goodsConsumers at home and abroad-buy more U.S.goods and fewer goods from other countriesHigher exportsLower importsHigher net exports34 2011
