Lecture 20-Openness in goods and financial markets.pdf

Lecture 20-Openness in goods and financial markets.pdf -...

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30-Jan-18 1 MACROECONOMICS LECTURE 20 OPENNESS IN GOODS AND FINANCIAL MARKETS CONTENTS OF THE LECTURE 1. What does openness mean? 2. Exports and imports 3. Exchange rates 4. Balance of payments CONTENTS OF THE LECTURE 1. What does openness mean? 2. Exports and imports 3. Exchange rates 4. Balance of payments
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30-Jan-18 2 1.WHAT DOES OPENNESS MEAN? So far we have mostly concentrated on closed economies (i.e. economies that do not interact with the rest of the world). However, in reality the interaction of the economies with the rest of the world plays a very important role. Openness in goods markets : the ability of consumers and firms to choose between domestic goods and foreign goods. Openness in financial markets : the ability of foreign investors to choose between domestic and foreign assets. 4 CONTENTS OF THE LECTURE 1. What does openness mean? 2. Exports and imports 3. Exchange rates 4. Balance of payments 2. EXPORTS AND IMPORTS Exports are the goods and services sold abroad. Imports are the goods and services bought from abroad. When exports>imports, there is a trade surplus (equivalently, a positive trade balance). When exports<imports, there is a trade deficit (equivalently, a negative trade balance). If buyers decide to buy more domestic goods, the demand for domestic goods increases and so does domestic output. If they decide to buy more foreign goods, the foreign output increases instead of domestic output. 6
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30-Jan-18 3 2. EXPORTS AND IMPORTS 7 US exports and imports as ratios of GDP, 1960-2010 2. EXPORTS AND IMPORTS 8 CONTENTS OF THE LECTURE 1. What does openness mean? 2. Exports and imports 3. Exchange rates 4. Balance of payments
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30-Jan-18 4 3. EXCHANGE RATES Nominal exchange rates between two currencies can be qu0ted in one of two ways: (a) As the price of the domestic currency (e.g. pound) in terms of the foreign currency (e.g. euro). Right now, 1 pound is worth around 1.15 euros (in other words, you can buy 1.15 euros by using 1 pound).
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