Lecture 5 - ECONOMICS 100B Professor Steven Wood 02/01/11...

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ECONOMICS 100B Professor Steven Wood 02/01/11 Lecture 5 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS I-Clicker points will be counted for correctness from now on. Also, Problem Set 1 will be posted on bSpace tomorrow and is due at the beginning of class next Tuesday: February 8. LECTURE Today’s lecture is a continuation of topics from Chapter 4. We will be looking at saving and investment in a Small Open Economy and in a Large Open Economy. In an Open Economy, we make two new assumptions: 1.) We assume that the country engages in international trade, so NX > or < 0, where NX = Net Exports. 2.) We assume that Perfect Capital Mobility exists, which means that there are no restrictions on capital flowing between different countries. Now, goods market equilibrium is no longer just S = I, as was the case in a closed economy, because we’ve added Net Exports back into the equation. Goods market equilibrium for an open economy is: S = I + NX or S – I = NX, where S = savings, I = investment, and NX = net exports. Basically, this equation tells us that the relationship between savings and investment determines exactly what net exports will be. A Small Open Economy is an open economy that is too small compared to the world economy to affect world price levels, and therefore has no effect on the world real interest rate, r w . This means that in every case, we can take r w as given. In this example, the world real interest rate,
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This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.

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Lecture 5 - ECONOMICS 100B Professor Steven Wood 02/01/11...

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