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Principles of Economics- Mankiw (5th) 636

Principles of Economics- Mankiw (5th) 636 - 658 PA R T E L...

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658 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES country to specialize in producing those goods and services in which it has a com- parative advantage. So far our development of macroeconomics has largely ignored the economy’s interaction with other economies around the world. For most questions in macro- economics, international issues are peripheral. For instance, when we discussed the natural rate of unemployment in Chapter 26 and the causes of inflation in Chapter 28, the effects of international trade could safely be ignored. Indeed, to keep their analysis simple, macroeconomists often assume a closed economy —an economy that does not interact with other economies. Yet some new macroeconomic issues arise in an open economy —an economy that interacts freely with other economies around the world. This chapter and the next one, therefore, provide an introduction to open-economy macroeconomics. We begin in this chapter by discussing the key macroeconomic variables that de- scribe an open economy’s interactions in world markets. You may have noticed
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