321LecNote12Ch5

321LecNote12Ch5 - Instructor : Kim, H.H. Fall 2009...

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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 1 Chapter 5. 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 Imports and exports (% of GDP), 2007 In an open economy, _________________________________ _________________________________ Imports Exports
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 2 Preliminaries C = I = G = EX = exports = _________________________________ IM = imports = _________________________________ = spending on foreign goods NX = net exports ( a.k.a. the “trade balance”) = _________________________________ GDP = expenditure on domestically produced g & s =+++ dd d Y CIGE X The national income identity in an open economy Y = C + I + G + NX or Trade surpluses and deficits trade surplus: output > spending and exports > imports Size of the trade surplus = _________________________ trade deficit: spending > output and imports > exports
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 3 Size of the trade deficit = _________________________ International capital flows Net capital outflow = S I = _________________________________ = net purchases of foreign assets the country’s purchases of foreign assets minus foreign purchases of domestic assets When S > I , country is a _________________________________ When S < I , country is a _________________________________ The link between trade & cap. flows NX = Y ( C + I + G ) implies NX = _________________________________ = _________________________________ _________________________________ Saving, investment, and the trade balance (percent of GDP) 1960-2007 trade balance (right scale) saving investment
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 4 U.S.: “The world’s 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 “world’s largest debtor nation” Saving and investment in a small open economy An open-economy version of the loanable funds model from Chapter 3. Includes many of the same elements: production function consumption function investment function exogenous policy variables National saving: The supply of loanable funds r S, I
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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 5 Assumptions about capital flows a. domestic & foreign bonds are perfect substitutes (same risk, maturity, etc .) b.
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This note was uploaded on 02/07/2011 for the course ECON 321 taught by Professor Sani during the Fall '08 term at Rutgers.

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321LecNote12Ch5 - Instructor : Kim, H.H. Fall 2009...

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