676 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES a precise theory of exchange rates, but it often provides a reasonable first approximation. QUICK QUIZ: Over the past 20 years, Spain has had high inflation, and Japan has had low inflation. What do you predict has happened to the number of Spanish pesetas a person can buy with a Japanese yen? CONCLUSION The purpose of this chapter has been to develop some basic concepts that macro-economists use to study open economies. You should now understand why a na-tion’s net exports must equal its net foreign investment, and why national saving must equal domestic investment plus net foreign investment. You should also un-derstand the meaning of the nominal and real exchange rates, as well as the impli-cations and limitations of purchasing-power parity as a theory of how exchange rates are determined. The macroeconomic variables defined here offer a starting point for analyzing an open economy’s interactions with the rest of the world. In the next chapter we
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