Lecture 5The open Economy, Unemployment

1

Lecture 5. The Open Economy, Unemployment

2

1. To acquaint students with the terminology necessary for understanding

the open economy.

2. To provide a simple model of international flows of capital and goods,

emphasizing that these ultimately depend upon the determinants of

saving and investment.

3. To present a simple model of the real exchange rate, emphasizing its

role in ensuring that the current account and the capital account sum to

zero.

4. To explain the determination of the nominal exchange rate.

The Open Economy

Lecture 5. The Open Economy

3

• Flows of goods and services between nations

• Financial flows between nations

Lecture 5. The Open Economy

4

Lecture 5. The Open Economy

5

Lecture 5. The Open Economy

6

Lecture 5. The Open Economy

7

Saving and Investment in a Small Open Economy

• Capital Mobility and the World Interest Rate

• Why Assume a Small Open Economy?

• The Model

Lecture 5. The Open Economy

8

Lucas Paradox:

Why does not capital flow from developed countries to developing countries?

Lecture 5. The Open Economy

9

Exchange Rates

• Nominal and Real Exchange Rates

• The Real Exchange Rate and the Trade Balance

• The Determinants of the Real Exchange Rate

Lecture 5. The Open Economy

10

The Determinants of the Real Exchange Rate

Lecture 5. The Open Economy

11

The Determinants of the Real Exchange Rate

Lecture 5. The Open Economy

12

Exchange Rates

• Nominal and Real Exchange Rates

• The Real Exchange Rate and the Trade Balance

• The Determinants of the Real Exchange Rate

• How Policies Influence the Real Exchange Rate

Lecture 5. The Open Economy

13

How Policies Influence the Real Exchange Rate

Lecture 5. The Open Economy

14

How Policies Influence the Real Exchange Rate

Lecture 5. The Open Economy

15

How Policies Influence the Real Exchange Rate

Lecture 5. The Open Economy

16

How Policies Influence the Real Exchange Rate

Lecture 5. The Open Economy

17

Exchange Rates

• Nominal and Real Exchange Rates

• The Real Exchange Rate and the Trade Balance

• The Determinants of the Real Exchange Rate

• How Policies Influence the Real Exchange Rate

• The Determinants of the Nominal Exchange Rate

Lecture 5. The Open Economy

18

Inflation and Nominal Exchange Rate

Lecture 5. The Open Economy

19

PPP

Lecture 5. The Open Economy, Unemployment

20

1. To show that unemployment is the natural consequence of labor force

dynamics and that the rate of unemployment is determined by the rates of

job separation and job finding.

2. To discuss how the process of job search leads to frictional unemployment

and how government policies such as unemployment insurance influence the

amount of frictional unemployment.

3. To discuss how wage rigidity leads to structural unemployment and also the

various causes of wage rigidity (minimum wages, unions, and efficiency

wages).

4. To teach some of the important facts about patterns of unemployment in

the United States and in Europe.

Unemployment

Lecture 5. Unemployment

21

Lecture 5. Unemployment

22

Job finding rate – f Separation rate – s

Lecture 5. Unemployment

23

• Frictional Unemployment

• Structural Unemployment

Lecture 5. Unemployment

24

Lecture 5. Unemployment

25

• Frictional Unemployment

• Structural Unemploymento Minimum wage laws

o Unions and Collective Bargaining

o Efficiency Wages

Lecture 5. Unemployment

26

Lecture 5. Unemployment

27

Lecture 5. Unemployment

28