Macroeconomics

Closed Economy Open Economy

An economy that does not interact with other An economy that interacts freely with
economies in the world other economies around the world

The International Flows

of Goods and Capital
An open economy interacts with other economies in two ways: -
1) It buys and sells goods and services in world product markets.
2) It buys and sells capital assets such as stocks and bonds in world financial markets.

Here we discuss these two activities and the close relationship between them.

The Flow of Goods:

Exports, Imports, and Net Exports

Net Exports
The value of a nation’s exports minus the value of its imports; also called the trade balance

Exports Imports
Goods and services that are Goods and services that are produced
produced domestically and sold abroad and sold domestically
abroad
 Trade Balance

The value of a nation’s exports minus the value of its imports; also called net exports

Trade Surplus Balanced Trade Trade Deficit

An excess of exports over A situation in which An excess of imports over
imports exports equal imports exports

The Flow of Financial Resources:

Net Capital Outflow

Net Capital Outflow

The purchase of foreign assets by domestic resident’s minus
the purchase of domestic assets by foreigners

The Equality of Net Exports

and Net Capital Outflow

Saving, Investment, and Their

Relationship to the International Flows

National Saving (S) equals Y – C -- G

 The Prices for International
Transactions: Real and Nominal
Exchange Rates

Nominal Exchange
Rates
The rate at which a person can trade the currency of
one country for the currency of another

Appreciation Depreciation

An increase in the value of a A decrease in the value of a currency

currency as measured by the amount as measured by the amount of
of foreign currency it can buy foreign currency it can buy

Real Exchange Rates

The rate at which a person can trade the goods and services
of one country for the goods and services of another
 A First Theory of Exchange-Rate
Determination:

Purchasing-Power Parity

A theory of exchange rates whereby a unit of any given currency

should be able to buy the same quantity of goods in all countries

Implications of Purchasing-
Power Parity