Lecture%2020 - Economics 102 Lecture 20 Open Economy Macro...

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1 Economics 102 Lecture 20 : Open Economy Macro I LECTURE 20 OPEN ECONOMY MACRO I 1 Open Economy Macro I § The U.S. has been experiencing very large international trade deficits and we have become the world’s largest debtor nation. How are these related? How concerned should we be? § Foreigners are buying up American assets on a large scale. Why? LECTURE 20 OPEN ECONOMY MACRO I 2 In this lecture, look for the answers to these questions: § How are international flows of goods and assets related? § What’s the difference between the real and nominal exchange rate? § What is “purchasing-power parity,” and how does it explain nominal exchange rates?
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2 LECTURE 20 OPEN ECONOMY MACRO I 3 Open vs. Closed Economies § Open economy : An economy that has interactions in trade and finance with other economies. § Closed economy : An economy that has no interactions in trade and finance with other economies. LECTURE 20 OPEN ECONOMY MACRO I 4 The Flow of Goods & Services § Exports : domestically-produced G&S sold abroad § Imports : foreign-produced G&S sold domestically § Net exports (NX) = value of exports – value of imports § Another name for NX : LECTURE 20 OPEN ECONOMY MACRO I 5 The Openness of the U.S. Economy 0% 5% 10% 15% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Exports Imports Percent of GDP Trade deficit = 6% of GDP in 7/2005
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3 LECTURE 20 OPEN ECONOMY MACRO I 6 A C T I V E L E L E A R N I N G G 1: : Variables that affect NX Variables that affect NX What do you think would happen to U.S. net exports if: A. Canada experiences a recession (falling incomes, rising unemployment) B. U.S. consumers decide to be patriotic and buy more products “Made in the U.S.A.” C. Prices of goods produced in Mexico rise faster than prices of goods produced in the U.S. LECTURE 20 OPEN ECONOMY MACRO I 7 A C T I V E L E L E A R N I N G G 1: : Answers Answers A. Canada experiences a recession (falling incomes, rising unemployment) U.S. consumers decide to be patriotic and buy more products “Made in the U.S.A.” LECTURE 20 OPEN ECONOMY MACRO I 8 A C T I V E L E L E A R N I N G G 1: : Answers Answers C. Prices of Mexican goods rise faster than prices of U.S. goods
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4 LECTURE 20 OPEN ECONOMY MACRO I 9 Variables that Influence Net Exports § consumer preferences for foreign and domestic goods § prices of goods at § incomes of consumers at § currency § transportation costs § government policies LECTURE 20 OPEN ECONOMY MACRO I 10 Trade Surpluses & Deficits NX measures the imbalance in a country’s trade in goods and services. Trade deficit : Trade surplus : Balanced trade : LECTURE 20 OPEN ECONOMY MACRO I 11 The Flow of Capital § Net capital outflow (NCO) : domestic residents ’ purchases of foreign assets minus foreigners’ § NCO is also called Note : Here we yield to conventional terminology and use the term “capital” to refer to money flows to buy foreign assets.
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Lecture%2020 - Economics 102 Lecture 20 Open Economy Macro...

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