Lec-8B - Chapter 31 - Open-Economy Macroeconomics Basic Concepts.ppt

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Open and Closed Economies
interact with other economies in the
world. There are no exports, no imports, and
no capital flows.

Open and Closed Economies
interacts freely with other
economies around the world.

An Open Economy
countries in two ways.
product markets.
financial markets.

An Open Economy
economy it imports and exports huge
!uantities of goods and services.
"ver the past four decades, international
trade and finance have become
increasingly important.

The Flow of Goods: Eports!
"mports! #et Eports
#xports are domestically produced
abroad.
and services that are sold domestically.

"mports! #et Eports
imports.
balance.

"mports! #et Eports
exports &NX ' are negative.
exports &NX ' are positive.
)ero exports and imports are exactly e!ual.

Factors That Affect
#et Eports
foreign goods.
The exchange rates at which people can
use domestic currency to buy foreign
currencies.

Factors That Affect #et
abroad.
country to country.
international trade.

Percent of GDP
The "nternationali$ation of the %&'&

The Flow of Capital: #et
Forei(n "n)estment
assets by foreigners.
+ord *otor corporation.

The Flow of Capital: #et
Forei(n "n)estment
Telmex, the *exican phone company, the
purchase raises U.S. net foreign
investment.
issued by the U.S. government, the
purchase reduces the U.S. net foreign
investment.

*aria+les that "nfl,ence #et
Forei(n "n)estment
foreign assets.
domestic assets.

The E,ality of #et Eports
and #et Forei(n "n)estment
+or an economy as a whole, $ and $+I
must balance each other so that/
NFI = NX This holds true because every transaction
that affects one side must also affect the other
side by the same amount.

'a)in(! "n)estment! and Their
.elationship to the "nternational
$et exports is a component of 012/
Y = C + I + G + NX $ational saving is the income of the
nation that is left after paying for current
consumption and government purchases/

'a)in(! "n)estment! and Their
.elationship to the "nternational
! = I + NX
+

'&( N&t"on&) !&#"n% &n* Domest"c In#estment '&s & percent&%e of GDP(
Percent of GDP
#et Forei(n "n)estment

'-( Net $ore"%n In#estment '&s & percent&%e of GDP(
1965 19951990198 5

.eal and #ominal Echan(e
.ates
prices are the nominal exchange rate
and the real exchange rate.

#ominal Echan(e .ates
currency of one country for the
currency of another.

The nominal exchange rate is
expressed in two ways/ In units of foreign currency per one U.S.
dollar.
And in units of U.S. dollars per one unit of
the foreign currency.

-apanese yen and U.S. dollar is 67 yen to
one dollar.
"ne yen trades for 8967 &:7.78;<' of a dollar.

If it buys less there is a depreciation of
the dollar.

.eal Echan(e .ates
which a person can trade the goods
and services of one country for the
goods and services of another.

.eal Echan(e .ates
The real exchange rate compares the
prices of domestic goods and foreign
goods in the domestic economy. If a case of 0erman beer is twice as
expensive as American beer, the real
exchange rate is 89; case of 0erman beer per
case of American beer.

.eal Echan(e .ates
prices of goods in the two countries
measured in local currencies.

.eal Echan(e .ates
determinant of how much a
country exports and imports.

.eal Echan(e .ates
exchange rate means that U.S. goods
have become cheaper relative to foreign
goods.
and abroad to buy more U.S. goods and
fewer goods from other countries.

.eal Echan(e .ates
imports fall, and both of these changes
raise U.S. net exports.
real exchange rate means that U.S. goods
have become more expensive compared
to foreign goods, so U.S. net exports fall.

0,rchasin(-0ower 0arity
the simplest and most widely accepted
theory explaining the variation of
currency exchange rates.

same !uantity of goods in all
countries.

Basic o(ic of
is based on a principle called the law of
one price.
good must sell for the same price in all
locations.

Basic o(ic of
unexploited profit opportunities would
differences in prices in different
markets is called arbitrage.

Basic o(ic of
converge.
power parity, a currency must have the
same purchasing power in all countries
and exchange rates move to ensure that.

"mplications of
always the same at home and abroad,
then the exchange rate cannot change.
The nominal exchange rate between the
currencies of two countries must reflect the
different price levels in those countries.

"mplications of
!uantities of money, the money loses value
both in terms of the goods and services it
can buy and in terms of the amount of
other currencies it can buy.

Exc/&n%e r&te
3one4 spp)4
Pr"ce )e#e)
100(
/,rin( the German yperinflation

imitations of
shipped from one country to another.
Tradable goods are not always perfect
substitutes when they are produced in
different countries.

',mmary
foreign goods and services sold domestically.
$et foreign investment is the ac!uisition of
foreign assets by domestic residents minus
the ac!uisition of domestic assets by
foreigners.

',mmary
always e!uals its net exports.
An economy%s saving can be used to
either finance investment at home or
to buy assets abroad.

',mmary
price of the goods and services of two
countries.

',mmary
so that each dollar buys more foreign
currency, the dollar is said to appreciate
or strengthen.
so that each dollar buys less foreign
currency, the dollar is said to depreciate
or weaken.

',mmary
power parity, a unit of currency should
buy the same !uantity of goods in all
countries.
countries.

0raphical
=eview

The "nternationali$ation of the %&'&
199 5

#ational 'a)in(! /omestic "n)estment! and
'&( N&t"on&) !&#"n% &n* Domest"c In#estment '&s & percent&%e of GDP(
Percent of GDP

#ational 'a)in(! /omestic "n)estment! and
'-( Net $ore"%n In#estment '&s & percent&%e of GDP(
1965 19951990198 5
00 0
Exc/&n%e r&te
3one4 spp)4
Pr"ce )e#e)
100(
/,rin( the German yperinflation

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Lec-8B - Chapter 31 - Open-Economy Macroeconomics Basic Concepts.ppt