ec-9 - Chapter 17: Macroeconomics in an Open Economy After...

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Chapter 17: Macroeconomics in an Open Economy After this chapter you should be able to : Explain how the balance of payments is calculated. Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports. Explain the saving and investment equation. Explain the effect of government budget deficit on investment in an open economy. Discuss the difference between the effectiveness of monetary and fiscal policy in an open economy and in a closed economy. Open economy is an economy that has interactions in trade or finance with other economies. Closed economy is an economy that has no interactions in trade or finance with other economies. Balance of payments is the record of a country’s trade with other countries in goods, services, and assets. The balance of payments contains three accounts: Current account records a country’s net exports, net investment income, and net transfers. Balance of trade is the difference between the value of the goods a country exports and the value of the goods a country imports. ( No Services ) Net exports equal the sum of the balance of trade (which accounts for goods only) and the balance of services . 1
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The Balance of Payments of the United States, 2006 (billions of dollars) Figure 17-1 CURRENT ACCOUNT Exports of Goods $ ,023 Imports of Goods –1,861 Balance of Trade –838 Exports of Services 423 Imports of Services –343 Balance of Services 80 Income Received on Investments 650 Income Payments on Investments –614 Net Income on Investments 36 Net Transfers –90 Balance on Current Account –812 Financial account is the part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country. Net foreign investment is the difference between capital outflows from a country and capital inflows also equal to net foreign direct investment plus net foreign portfolio investment. There is a capital outflow from the U.S. when an investor in the U.S. buys a bond issued by a foreign company or government or when a U.S. firm builds a factory in another country. When firms build or buy facilities in foreign countries, they are engaging in foreign direct investment (an outflow). When investors buy stock or bonds issued in another country, they are engaging in foreign portfolio investment or indirect investment (an outflow). There is
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ec-9 - Chapter 17: Macroeconomics in an Open Economy After...

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