Oct19OpenEconomy

Oct19OpenEconomy - Announcements Midterm Related Matters...

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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 0 Announcements Announcements ± Midterm Related Matters ± Last week’s lecture Clarifying Contradiction in Slides Unemployment?? ± Homework Due ± Homework will be posted ± Today: Open Economy
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 1 Open Open - - or or - - Closed Closed ± Economic Interactions between countries ± Affects where consumption, investment, and government expenditure is allocated Domestic product? Foreign product? ± Must make a distinction between SAVINGS and INVESTMENT ± LARGE and SMALL
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 2 Imports and Exports Imports and Exports as a percentage of output: 2003 as a percentage of output: 2003 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Canada France Germany Italy Japan Mexico U.K. USA Pe rcent age of GD P Imports Exports 0% 5% France Italy Japan Mexico Imports Exports source: OECD
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 3 Accounting: Basic Setup Accounting: Basic Setup df CC C =+ EX = exports = foreign spending on domestic goods IM = imports = C f + I + G = spending on foreign goods NX = net exports (a.k.a. the “trade balance”) = superscripts: d = spending on domestic goods f = spending on foreign goods II I GG G
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 4 GDP = expenditure on GDP = expenditure on domestically produced g & s domestically produced g & s dd d Y CI G E X =+++ () ff f CC I =− +− +− + C + + M N
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 5 The national income identity The national income identity in an open economy in an open economy Y = = C + + I + + G + + NX or, = –( + + ) domestic spending output net exports
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 6 U.S. net exports U.S. net exports (% of GDP), 1975 (% of GDP), 1975 - - 2003 2003 -5% -4% -3% -2% -1% 0% 1% 2% 1975 1980 1985 1990 1995 2000 -5% -4% -3% -2% -1% 0% 1% 2% 1975 1980 1985 1990 1995 2000
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 7 Trade surpluses and deficits Trade surpluses and deficits NX = EX IM = Y –( C + I + G ) ± trade surplus: output > spending and exports > imports Size of the trade surplus = ± trade deficit: spending > output and imports > exports Size of the trade deficit =
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 8 International capital flows International capital flows ± Net capital outflows = S I = net outflow of “loanable funds” = net purchases of foreign assets the country’s purchases of foreign assets minus foreign purchases of domestic assets ± When > , country is a net lender ± When < , country is a net borrower
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CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 9 The link between trade & cap. flows The link between trade & cap. flows NX = Y –( C + I + G ) implies = ( ) – = S trade balance = net capital outflows Thus, a country with a trade deficit ( < 0 ) is a net borrower ( < I ).
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Oct19OpenEconomy - Announcements Midterm Related Matters...

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