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Foreign Trade

Foreign Trade. Holmes Econ 10. Open Economy. One of our assumptions was a closed economy A nontrivial portion of of our economy is in fact due to foreign trade. Definitions. Imports (IM): value of goods produced in other countries that are sold in the home country (US, say)

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Foreign Trade

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  1. Foreign Trade Holmes Econ 10

  2. Open Economy • One of our assumptions was a closed economy • A nontrivial portion of of our economy is in fact due to foreign trade

  3. Definitions Imports (IM): value of goods produced in other countries that are sold in the home country (US, say) Exports (X): value of goods produced in the the US and sold in other countries Imports come IMto the country (sorry)

  4. Specifications How many more Toyotas would be sold in the US if Y increased dramatically? A: A few How many more Fords would be sold in China if Y increased? A: none. Do the Chinese care how well we do?

  5. Specifications Imports are one type of good that consumers can choose from. Thus, as Y increase, IM should increase. But Exports have no tie to domestic Y. Thus, Y should not affect X.

  6. Y and D How are these affected? What happens every time someone buys a Spice Girls CD? The portion of C that is spent on foreign goods must be subtracted out. That is, imports are a leakage from the D stream. Likewise, every time someone buys a Ford, the demand for US goods and services increases. Thus, D=C+I+G+X-IM Thus, MPS = MPC + MPI - MPIM

  7. Model (wow!!)

  8. New Marginal Propensity to Spend Why?

  9. Flow Chart

  10. Problem Suppose Savings falls by 20 and we start sending 20 more dollars in Cowboy hats to Japan Find: Mult Change in Y Effect on trade deficit

  11. Answer

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