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Macro%20Chapter%2012

Macro%20Chapter%2012 - Chapter12 Main questions How are...

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Chapter 12 Open-Economy Macroeconomics Open-Economy Macroeconomics
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Main questions: How are international flows of goods and assets related? What’s the difference between the real and nominal exchange rate? What is “purchasing-power parity,” and how does it explain nominal exchange rates?
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Introduction Recall: Trade can make everyone better off. Basic concepts of international macroeconomics: the trade balance (trade deficits, surpluses) international flows of assets exchange rates
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Closed vs. Open Economies A closed economy does not interact with other economies in the world. An open economy interacts freely with other economies around the world. It buys and sells goods and services in world product markets. It buys and sells capital assets in world financial markets.
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The Flow of Goods & Services Exports : domestically-produced goods sold abroad Imports : foreign - produced goods sold domestically Net exports (NX) = value of exports - value of imports Another name for NX : the trade balance .
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Variables that Influence Net Exports consumers’ preferences for foreign and domestic goods prices of goods at home and abroad incomes of consumers at home and abroad the exchange rates at which foreign currency trades for domestic currency transportation costs Government policies
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Trade Surpluses & Deficits NX measures the imbalance in a country’s trade in goods and services. Trade deficit : an excess of imports over exports Trade surplus : an excess of exports over imports Balanced trade : exports = imports
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The Flow of Capital Net capital outflow (NCO) : domestic residents’ purchases of foreign assets - foreigners’ purchases of domestic assets NCO is also called net foreign investment . When a Canadian resident buys stock in Telmex, the Mexican phone company, the purchase raises Canadian net capital outflow. When a Japanese resident buys a bond issued by the Canadian government, the purchase reduces Canadian net capital outflow.
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The Flow of Capital The flow of capital abroad takes two forms: Foreign direct investment : If Tim Hortons opens a fast food outlet in Russia, that is an example of foreign direct investment Foreign portfolio investment :
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