Chapter 5 student

Chapter 5 student - Click to edit Master subtitle style The...

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Unformatted text preview: Click to edit Master subtitle style The Open Economy Mankiw Chapter 5 Overview 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 Imports and exports (% of GDP), 2007 2 4 6 8 10 12 Imports Exports In an open economy, spending need not equal output saving need not equal investment 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 GDP = expenditure on domestically produced g & s d d d Y C I G EX = + + + ( ) ( ) ( ) f f f C C I I G G EX =- +- +- + O bj1 0 5 C I G EX I M = + + +- C I G NX = + + + The national income identity in an open economy Y = C + I + G + NX or, NX = Y ( C + I + G ) net exports domestic spending output Trade surpluses and deficits trade surplus: output > spending and exports > imports Size of the trade surplus = NX trade deficit: spending > output and imports > exports Size of the trade deficit = NX NX = EX IM = Y ( C + I + G ) International capital flows Net capital outflow = S I = net outflow of loanable funds = net purchases of foreign assets the countrys purchases of foreign assets minus foreign purchases of domestic assets When S > I , country is a net lender When S < I , country is a net borrower The link between trade & cap. flows NX = Y ( C + I + G ) implies NX = ( Y C G ) I = S I trade balance = net capital outflow Thus, a country with a trade deficit ( NX < ) is a net borrower ( S < I ). Saving, investment, and the trade balance (percent of GDP) 1960-2007 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 0.22 0.24-0.06-0.04-0.02 0.02 0.04 0.06 0.08 trade balance (right scale) saving investment U.S.: The worlds largest debtor nation Every year since 1980s: huge trade deficits and net capital inflows, i.e. net borrowing from abroad As of 12/31/2008: U.S. residents owned $19.9 trillion worth of foreign assets Foreigners owned $23.4 trillion worth of U.S. assets U.S. net indebtedness to rest of the world: $3.5 trillion--higher than any other country, hence U.S. is the worlds largest debtor nation Saving and investment in a small open economy An open-economy version of the loanable funds model from Chapter 3....
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This note was uploaded on 02/05/2011 for the course BUAD 500 taught by Professor Wilson during the Spring '11 term at William & Mary.

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Chapter 5 student - Click to edit Master subtitle style The...

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