Economics 100B - 21 (4-03-2007)

Economics 100B - 21 (4-03-2007) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 4/03/07 Lecture 21 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course ANNOUCEMENTS We have two major topics we will cover with the remainder of the semester. This week and next we will discuss international trade and exchange rates. After that we will discuss inflation and have a few concluding lectures. Today we will discuss open economy macroeconomics. Open refers to an economy that engages in trade with other nations. International Trade Linkages Net Export Assumptions 1) Exports: X = Xo + xYf. We have left off interest rates; soon we will bring in exchange rates to replace them. 2) Import: M = Mo + mY. Our domestic income determines imports; the other country’s income determines our exports. One country’s exports are another country’s imports. Example Let’s assume that there are only two countries, the US and Japan. Let us assume that Japan exports a lot to the US but the US does not export a lot to Japan. What happens if the US experiences an investment boom? An investment boom shifts our IS curve out raising equilibrium income (IS1). This higher income raises our imports thus raising Japan’s exports. The IS curve for Japan shifts out because of this (IS2). Japan now has higher income due to its increased exports and will now import slightly more from the US shifting the US’ IS curve out yet again (IS3). This effect disappears quickly in most countries due to their low marginal propensity to import. Conclusion
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Economics 100B - 21 (4-03-2007) - Economics 100B Professor...

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