Open Economy Macroeconomics
The purpose of Chapter 18 is to develop the basic concepts macroeconomists use to study open
economies. It addresses why a nation’s net exports must equal its net capital outflow. It also
addresses the concepts of the real and nominal exchange rate and develops a theory of exchange
rate determination known as purchasing-power parity.
By the end of this chapter, students should understand:
how net exports measure the international flow of goods and services.
how net capital outflow measures the international flow of capital.
why net exports must always equal net foreign investment.
how saving, domestic investment, and net capital outflow are related.
the meaning of the nominal exchange rate and the real exchange rate.
purchasing-power parity as a theory of how exchange rates are determined.
Practice Questions, page103
What is the impact of the following actions on imports, exports and net exports? Quantify your
A convention of Spanish chiropractors meeting in Paris, drink 500 bottles of Napa wine with a
value of $15,000
U.S. exports rise, imports are unchanged, and net exports increase by $15,000
Your sister visits Germany and spends $2000 there on hotels and food.
Your sister spends money buying foreign goods and services, so U.S. exports are unchanged, imports
increase, and net exports decrease by $2,000
Your brother, who lives in Nebraska, buys a Volkswagen Passat for $20,000.
When your brother buys a new Volkswagen Passat, an American is buying a foreign good, so U.S.
exports are unchanged, imports rise, and net exports decline by $20,000
Benito, a foreign student from Spain, pays $4,000 tuition to attend DVC.
Benito purchases U.S. services, so U.S. exports increase, imports are unchanged, and net exports
increase by $4,000
Your professor provides economic advice to the Government of Honduras for a fee of $30,000.
A foreign country buys services from the US so U.S. exports increase, imports are unchanged, and net