lecture11 - CHAPTER 5 CHAPTER 5 The Open Economy The Open...

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Unformatted text preview: CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 1 Lecture 11 Lecture 11 Open economy CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 2 In an open economy, In an open economy, spending need not equal output saving need not equal investment CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 3 Preliminaries Preliminaries NX = net exports ( a.k.a. the trade balance) = EX IM If NX > 0, country has a trade surplus equal to NX If NX < 0, country has a trade deficit equal to NX CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 4 The national income identity The national income identity in an open economy in an open economy Y Y = = C C + + I I + + G G + + NX NX or, NX = Y ( C + I + G ) net exports domestic spending output CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 5 International capital flows International capital flows Net capital outflows = S I = net outflow of loanable funds = net purchases of foreign assets the countrys purchases of foreign assets minus foreign purchases of domestic assets When S > I , country is a net lender When S < I , country is a net borrower CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 6 Another important identity Another important identity NX NX = = Y Y ( ( C C + + I I + + G G ) ) implies implies NX NX = ( = ( Y Y C C G G ) ) I I = = S S I I trade balance trade balance = = net capital outflows net capital outflows CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 7 Saving and Investment Saving and Investment in a Small Open Economy in a Small Open Economy An open-economy version of the loanable funds model from chapter 3. Includes many of the same elements: production function: ( , ) Y Y F K L = = consumption function: ( ) C C Y T =- investment function: ( ) I I r = exogenous policy variables: , G G T T = = CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 8 National Saving: National Saving: The Supply of Loanable Funds The Supply of Loanable Funds r S, I As in Chapter 3, national saving does not depend on the interest rate ( ) S Y C Y T G =--- S CHAPTER 5 CHAPTER 5 The Open Economy The Open Economy slide 9 Assumptions re: capital flows Assumptions re: capital flows a. domestic & foreign bonds are perfect substitutes (same risk, maturity, etc.) b. perfect capital mobility...
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This note was uploaded on 04/14/2010 for the course ECON 3353 taught by Professor Prodan during the Spring '05 term at University of Alabama - Huntsville.

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lecture11 - CHAPTER 5 CHAPTER 5 The Open Economy The Open...

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