Ch. 19 Macroeconomic Theory of the Open Economy
Introduction: The previous chapter explained the basic concepts and vocabulary of the open economy:net exports (NX),
net capital outflow (NCO), and exchange rates. This chapter ties these concepts together i
Trade Agreements: A country can liberalize trade with: unilateral reductions in trade restrictions and multilateral
agreements with other nations. Examples of trade agreements: North American Free Trade Agreement (NAFTA), 1993
and General Agreement on Tar
Ch. 9: International Trade
Introduction: Recall from Chapter 3: A country has a comparative advantage in a good if it produces the good at lower
opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has
Tariff: An Example of a Trade Restriction: Tariff: a tax on imports; Example: Cotton shirts; PW = $20, Tariff: T =
$10/shirt, Consumers must pay $30 for an imported shirt. So, domestic producers can charge $30 per shirt. In general, the
price facing domes
1.The demand for dollars increases. The foreigner needs dollars in order to purchase the U.S. asset.
2.The supply of dollars falls. The transaction reduces NCO, which we think of as the supply of dollars. (So, NCO is really
the net supply of dollars.) Aga
Why the AD Curve Slopes Downward: Y = C + I + G + NX; Assume G fixed by govt policy. To understand the slope of
AD, must determine how a change in P affects C, I, and NX.
Why the AD Curve Might Shift: Any event that changes C, I, G, or NX except a change
Trade Surpluses & Deficits: NX measures the imbalance in a countrys trade in goods and services. Trade deficit: an
excess of imports over exports; Trade surplus: an excess of exports over imports; Balanced trade: when exports = imports
The Flow of Capital
Ch. 20 Aggregate Demand and Aggregate Supply
In the short run, GDP fluctuates around its trend. Recessions: periods of falling real incomes and rising unemployment.
Depressions: severe recessions (very rare )Short-run economic fluctuations are often calle
The Nominal Exchange Rate: Nominal exchange rate: the rate at which one countrys currency trades for another. We
express all exchange rates as foreign currency per unit of domestic currency.
Appreciation and Depreciation: Appreciation (or strengthening):
The Law of One Price: Law of one price: the notion that a good should sell for the same price in all markets; Suppose
coffee sells for $4/pound in Seattle and $5/pound in Boston, and can be costlessly transported. There is an opportunity for