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Lecture_7 - Open Economy Macroeconomics Open-Economy...

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Open Economy Macroeconomics Open-Economy Macroeconomics: Basic Concepts 0. Open and Closed Economies 0. A closed economy is one that does not interact with other economies in the world. 0. There are no exports, no imports, and no capital flows. 1. An open economy is one that interacts freely with other economies around the world. Open-Economy Macroeconomics: Basic Concepts 1. An open economy interacts with other countries in two ways. 2. It buys and sells goods and services in world product markets. 3. It buys and sells capital assets in world financial markets. THE INTERNATIONAL FLOW OF GOODS AND CAPITAL 2. The Flow of Goods: Exports, Imports, and Net Exports 4. The United States is a very large and open economy—it imports and exports huge quantities of goods and services. 5. Over the past four decades, international trade and finance have become increasingly important. The Flow of Goods: Exports, Imports, Net Exports 3. Exports are goods and services that are produced domestically and sold abroad. 4. Imports are goods and services that are produced abroad and sold domestically. The Flow of Goods: Exports, Imports, Net Exports 5. Net exports ( NX ) are the value of a nation’s exports minus the value of its imports. 6. Net exports are also called the trade balance. The Flow of Goods: Exports, Imports, Net Exports 7. A trade deficit is a situation in which net exports ( NX ) are negative. 0. Imports > Exports 8. A trade surplus is a situation in which net exports ( NX ) are positive. 1. Exports > Imports
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9. Balanced trade refers to when net exports are zero— exports and imports are exactly equal. The Flow of Goods: Exports, Imports, Net Exports 10. Factors That Affect Net Exports 2. The tastes of consumers for domestic and foreign goods. 3. The prices of goods at home and abroad. 4. The exchange rates at which people can use domestic currency to buy foreign currencies. The Flow of Goods: Exports, Imports, Net Exports 11. Factors That Affect Net Exports 5. The incomes of consumers at home and abroad. 6. The costs of transporting goods from country to country. 7. The policies of the government toward international trade. The Increasing Openness of the U.S. Economy 12. In the 1950s, imports and exports of goods and services were between 4 and 5 percent of GDP 13. In 2007, exports were 12 percent of GDP and imports were 17 percent! Figure 1 The Internationalization of the U.S. Economy The Flow of Financial Resources: Net Capital Outflow 14. Net capital outflow refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. 15. A U.S. resident buys stock in the Toyota corporation and a Mexican buys stock in the Ford Motor corporation. The Flow of Financial Resources: Net Capital Outflow 16. Net Capital Outflow = Purchase of foreign assets by domestic residents – Purchase of domestic assets by foreigners The Flow of Financial Resources: Net Capital Outflow 17. When a U.S. resident buys stock in Telmex, the Mexican phone company, the purchase raises U.S. net capital outflow.
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18. When a Japanese residents buys a bond issued by the
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