1、PowerPoint Slides prepared by: Andreea CHIRITESCUEastern Illinois UniversityOpen-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 pro

2、duct or service or otherwise on a password-protected website for classroom use.Basic 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. Ma

3、y 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 ExportsGoods & servicesProduced domesticallySold abroad

4、ImportsGoods and servicesProduced abroadSold domestically3 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

5、or classroom use.International Flow of Goods Net exportsValue of a nations exports Minus the value of 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, scan

6、ned, 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 Trade surplusExcess of exports over imports Trade deficitExcess of imports over e

7、xports Balanced tradeExports equal imports5 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 us

8、e.International Flow of Goods Factors that influence a countrys exports, imports, and net exports:Tastes of consumers 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 Ce

9、ngage 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.International Flow of Goods Factors that influenc

10、e a countrys exports, imports, and net exports:Cost of transporting goods from country to countryGovernment policies toward international 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 distri

11、buted with a certain product or service or otherwise on a password-protected website for classroom use.The increasing openness of the U.S. economy Increasing importance of international trade and finance1950s, imports and exports: 4-5% of GDPRecent years: Exports increased more than twice Imports in

12、creased more than three times8 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 increas

13、ing openness of the U.S. economy Increase in international tradeImprovements in transportationAdvances in telecommunicationsTechnological progress Governments trade policies NAFTA GATT9 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except

14、 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 110 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 lice

15、nse distributed with a certain product or service or otherwise on a password-protected website for classroom use.The Internationalization of the U.S. EconomyThis figure shows exports and imports of the U.S. economy as a percentage of U.S. gross domestic product since 1950. The substantial increases

16、over time show the increasing importance of international trade and finance.International Flow of Capital Net capital outflow Purchase of foreign assets by domestic residentsForeign direct investmentForeign portfolio investmentMinus the purchase of domestic assets by foreigners11 2011 Cengage Learni

17、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.International Flow of Capital Variables that influence net ca

18、pital outflowReal interest rates paid on foreign assetsReal interest rates paid on domestic assetsPerceived economic and political risks of holding assets abroadGovernment policies that affect foreign ownership of domestic assets12 2011 Cengage Learning. All Rights Reserved. May not be copied, scann

19、ed, 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 Net exports (NX)Imbalance between a countrys exports and its imports Net capit

20、al outflow (NCO)Imbalance betweenAmount of foreign assets bought by domestic residentsAnd the amount of domestic assets bought by foreigners Identity: NCO = NX13 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in

21、 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 more goods and services to foreigners Than it is buying from themFrom net sale of goods and servicesReceives foreig

22、n 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 as permitted in a license distributed with a certain product or service or otherwise on a password-prot

23、ected 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 servicesNeeds financedSelling assets abroadCapital - flowing into the country: NCO Imports Net exports 0 Y Do

24、mestic 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 certain product or service or otherwise on a password-protected website for classroom use.Intern

25、ational 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 use as permitted in a license distributed with a certain product or service or oth

26、erwise 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 copied, scanned, or duplicated, in whole or in part, except for use as

27、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 in part, except for use as permitted in a license distribut

28、ed 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 national problem? Past two decadesBorrowed heavily in worl

29、d 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 for use as permitted in a license distribut

30、ed 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 inflowU.S. - going into debt22 2011 Ce

31、ngage 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? Cha

32、nges 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 Learning. All Rights Reserved.

33、 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 flow of capital (f

34、rom 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 service or

35、 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

36、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 web

37、site for 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 a

38、ll26 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 deficit a national

39、problem? Trade deficit 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 desirable2

40、7 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 228 2011 Cengage Learning. All Ri

41、ghts 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 (a)

42、shows national saving and domestic investment 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 investmen

43、t.Figure 229 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.National Saving, Domestic Inv

44、estment, and Net Capital OutflowPanel (b) shows net 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 redu

45、ced domestic investment.Real & Nominal Exchange Rates 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 currenc

46、y30 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.Real & Nominal Exchange Rates Depr

47、eciation (weaken)Decrease in the value of a currencyAs measured by the 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 wi

48、th a certain product or service or otherwise on a password-protected website 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 pri

49、ceForeign price 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.Real & Nominal Exchang

50、e Rates Real exchange rate = (e P) / P* Using price indexes e nominal exchange rate between the U.S. 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 p

51、art, 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 (fall) in the U.S. real exchange rateU.S. goods - cheaper relative to foreign goodsConsumers at ho

52、me and abroad - buy more U.S. goods and fewer goods from other countriesHigher exportsLower importsHigher net exports34 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 prod

53、uct or service or otherwise on a password-protected website for classroom use.Real & Nominal Exchange Rates An appreciation (rise) in the U.S. real exchange rateU.S. goods - more expensive compared to foreign goodsConsumers at home and abroad - buy fewer U.S. goods and more goods from other coun

54、triesLower exportsHigher importsLower net exports35 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 clas

55、sroom use.Purchasing-Power Parity Purchasing-power parity, PPPTheory of exchange ratesA unit of any given currencyShould be able to buy the same quantity of goods in all countries Basic logic of purchasing-power parityBased on law of one priceA good must sell for the same price in all locations36 20

56、11 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.Purchasing-Power Parity ArbitrageTake advant

57、age of price differences for the same item in different markets ParityEquality Purchasing-powerValue of money in terms of quantity of goods it can buy37 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 licens

58、e distributed with a certain product or service or otherwise on a password-protected website for classroom use.Implications of PPP If purchasing power of the dollarIs always the same at home and abroadThen the real exchange rate cannot change Theory of purchasing-power parityNominal exchange rate be

59、tween the currencies of two countriesMust reflect the price levels in those countries38 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

60、 password-protected website for classroom use.Nominal exchange rate during a hyperinflation Natural experiment hyperinflationHigh inflationArises when a government prints money to pay for large amounts of government spending German hyperinflation, early 1920sMoney supply, price level, nominal exchange rate Move closely together39 2