Chapter 31: 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

Chapter 31.1: The International Flows of Goods and Capital

• 31.1a: 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 nation’s exports minus the value of its importance, also called the trade balance

    • Net exports = Value f country’s exports - Value of country’s imports

  • Trade balance: the value of a nation’s 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

• 31.1b: 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 asset 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

• 31.1c: 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). When capital flows out of the company, (NCO > 0)

• 31.1d: 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, NCO = 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

• 31.1e: 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

Chapter 31.2: The Prices for International Transactions: Real and Nominal Exchange Rates

• 31.2a: 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