Ch18 openess in goods and financial markets - Copy - Chapter 18 Openness in Goods and Financial Markets We have assumed until now that the economy was

Ch18 openess in goods and financial markets - Copy -...

This preview shows page 1 - 3 out of 42 pages.

Chapter 18. Openness in Goods and Financial Markets We have assumed until now that the economy was closed —that it did not interact with the rest of the world. We had to start this way, to keep things simple and build up your intuition for the basic macroeconomic mechanisms. We are now ready to relax this assumption. Understanding the macroeconomic implications of openness will occupy us for this and the next three chapters. “Openness” has three distinct dimensions: 1. Openness in goods markets —the ability of consumers and firms to choose between domestic goods and foreign goods. In no country is this choice completely free of restrictions: Even the countries most committed to free trade have tariffs —taxes on imported goods—and quotas —restrictions on the quantity of goods that can be imported— on at least some foreign goods. At the same time, in most countries, average tariffs are low and getting lower. 2. Openness in financial markets —the ability of financial investors to choose between domestic assets and foreign assets. Until recently even some of the richest countries, such as France and Italy, had cap- ital controls —restrictions on the foreign assets their domestic res- idents could hold and on the domestic assets foreigners could hold. These restrictions are rapidly disappearing. As a result, world financial markets are becoming more and more closely integrated. 1
3. Openness in factor markets —the ability of firms to choose where to locate production, and of workers to choose where to work. Here also trends are clear. Multinational companies operate plants in many countries and move their operations around the world to take advantage of low costs. Much of the debate about the North American Free Trade Agreement (NAFTA) signed in 1993 by the United States, Canada, and Mexico centered on its implications for the relocation of U.S. firms to Mexico. Similar fears now center around China. And immigration from low-wage countries is a hot political issue in countries from Germany to the United States. In the short run and in the medium run—the focus of this and the next three chapters—openness in factor markets plays much less of a role than openness in either goods markets or financial markets. Thus, I shall ignore openness in factor markets, and focus on the implications of the first two dimensions of openness here. Section 18–1 looks at openness in the goods market, the determinants of the choice between domestic goods and foreign goods, and the role of the real exchange rate. Section 18–2 looks at openness in financial markets, the determinants of the choice between domestic assets and foreign assets, and the role of interest rates and exchange rates. Section 18–3 gives the map to the next three chapters.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture