Ch_5 - LectureNoteChapter5 TheOpenEconomy University of...

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slide 1      Lecture Note-Chapter 5          The Open Economy University of Waterloo Department of Economics Spring 2010 CHAPTER 5 The Open Economy
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slide 2  Introduction This chapter introduces a simple model of a small open economy in the long run. The main aims of the chapter are as follows: 1. To acquaint students with the terminology necessary for understanding the open economy. 2. To provide a simple model of international flows of capital and goods, emphasizing that these ultimately depend upon the determinants of saving and investment. CHAPTER 5 The Open Economy
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slide 3  Introduction 3. To present a simple model of the real exchange rate. 4. To explain the determination of the nominal exchange rate. CHAPTER 5 The Open Economy
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slide 4 CHAPTER 5 The Open Economy In this chapter, you will learn… accounting identities for the open economy. the small open economy model what makes it “small”. how the trade balance and exchange rate are determined. how policies affect trade balance & exchange rate.
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slide 5 I       Imports and exports  (% of GDP), 2007 Imports Exports CHAPTER 5 The Open Economy
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slide 6 CHAPTER 5 The Open Economy Trade-GDP ratio, selected countries,  2005 (Imports + Exports) as a percentage of GDP  Luxembourg 297.2% Ireland 149.9 Czech Republic 141.5 Hungary 134.2 Austria 103.8 Sweden 89.8 Switzerland 89.0 Korea, Republic of 82.2 Germany 76.2% Poland 74.7 Canada 72.0 Mexico 61.5 Turkey 61.4 United Kingdom 56.8 Spain 56.4 France 53.0 Italy 52.2 Australia 42.1 Japan 27.3 United States 26.8
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slide 7 CHAPTER 5 The Open Economy In an open economy, spending need not equal output saving need not equal investment
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slide 8  In an open economy, Residents of an open economy can spend more than the country’s output simply by importing foreign goods. Residents can spend less than output, and the extra output will be exported. CHAPTER 5 The Open Economy
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slide 9  In an open economy, Regarding “saving need not equal investment”: If individuals in an open economy want to save more than domestic firms want to borrow, no problem. The savers simply send their extra funds abroad to buy foreign assets. Similarly, if domestic firms want to borrow more than individuals are willing to save, then the firms simply borrow from abroad (i.e. sell bonds to foreigners). CHAPTER 5 The Open Economy
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slide 10 CHAPTER 5 The Open Economy Preliminaries EX = exports = foreign spending on domestic goods IM = imports = C f + I f + G f = spending on foreign goods NX = net exports ( a.k.a. the “trade balance”) = EX IM d f C C C = + d f I I I = + d f G G G = + superscripts: d = spending on domestic goods f = spending on foreign goods
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slide 11 CHAPTER 5 The Open Economy GDP = expenditure on  d d d Y C I G EX = + + + ( ) ( ) ( ) f f f C C I I G G EX = - + - + - + ( ) f f f C I G EX C I G = + + + - + + C I G EX I M = + + + - C I G NX = + + +
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This note was uploaded on 11/25/2010 for the course ECON 202 taught by Professor Angelatrimarchi during the Spring '10 term at Waterloo.

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Ch_5 - LectureNoteChapter5 TheOpenEconomy University of...

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