slide1
Download
Skip this Video
Download Presentation
11 THE MACROECONOMICS OF OPEN ECONOMIES

Loading in 2 Seconds...

play fullscreen
1 / 46

11 THE MACROECONOMICS OF OPEN ECONOMIES - PowerPoint PPT Presentation


  • 973 Views
  • Uploaded on

11 THE MACROECONOMICS OF OPEN ECONOMIES. 31. Open-Economy Macroeconomics: Basic Concepts. Open-Economy Macroeconomics: Basic Concepts . Open and Closed Economies A closed economy is one that does not interact with other economies in the world.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about '11 THE MACROECONOMICS OF OPEN ECONOMIES' - ryanadan


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1
11

THE MACROECONOMICS OF OPEN ECONOMIES

slide2

31

Open-Economy Macroeconomics: Basic Concepts

open economy macroeconomics basic concepts
Open-Economy Macroeconomics: Basic Concepts
  • Open and Closed Economies
    • A closed economy is one that does not interact with other economies in the world.
      • There are no exports, no imports, and no capital flows.
    • An open economy is one that interacts freely with other economies around the world.
open economy macroeconomics basic concepts4
Open-Economy Macroeconomics: Basic Concepts
  • An Open Economy
    • An open economy interacts with other countries in two ways.
      • It buys and sells goods and services in world product markets.
      • It buys and sells capital assets in world financial markets.
the international flow of goods and capital
THE INTERNATIONAL FLOW OF GOODS AND CAPITAL
  • An Open Economy
    • The United States is a very large and open economy—it imports and exports huge quantities of goods and services.
    • Over the past four decades, international trade and finance have become increasingly important.
the flow of goods exports imports net exports
The Flow of Goods: Exports, Imports, Net Exports
  • Exports are goods and services that are produced domestically and sold abroad.
  • Imports are goods and services that are produced abroad and sold domestically.
the flow of goods exports imports net exports7
The Flow of Goods: Exports, Imports, Net Exports
  • Net exports (NX) are the value of a nation’s exports minus the value of its imports.
  • Net exports are also called the trade balance.
the flow of goods exports imports net exports8
The Flow of Goods: Exports, Imports, Net Exports
  • A trade deficit is a situation in which net exports (NX) are negative.
    • Imports > Exports
  • A trade surplus is a situation in which net exports (NX) are positive.
    • Exports > Imports
  • Balanced trade refers to when net exports are zero—exports and imports are exactly equal.
the flow of goods exports imports net exports9
The Flow of Goods: Exports, Imports, Net Exports
  • Factors That Affect Net Exports
    • The tastes of consumers for domestic and foreign goods.
    • The prices of goods at home and abroad.
    • The exchange rates at which people can use domestic currency to buy foreign currencies.
the flow of goods exports imports net exports10
The Flow of Goods: Exports, Imports, Net Exports
  • Factors That Affect Net Exports
    • The incomes of consumers at home and abroad.
    • The costs of transporting goods from country to country.
    • The policies of the government toward international trade.
figure 1 the internationalization of the u s economy
Figure 1 The Internationalization of the U.S. Economy

Percent

of GDP

15

Imports

10

Exports

5

0

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Copyright © 2004 South-Western

the flow of financial resources net capital outflow
The Flow of Financial Resources: Net Capital Outflow
  • Net capital outflow refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.
    • A U.S. resident buys stock in the Toyota corporation and a Mexican buys stock in the Ford Motor corporation.
the flow of financial resources net capital outflow13
The Flow of Financial Resources: Net Capital Outflow
  • When a U.S. resident buys stock in Telmex, the Mexican phone company, the purchase raises U.S. net capital outflow.
  • When a Japanese residents buys a bond issued by the U.S. government, the purchase reduces the U.S. net capital outflow.
the flow of financial resources net capital outflow14
The Flow of Financial Resources: Net Capital Outflow
  • Variables that Influence Net Capital Outflow
    • The real interest rates being paid on foreign assets.
    • The real interest rates being paid on domestic assets.
    • The perceived economic and political risks of holding assets abroad.
    • The government policies that affect foreign ownership of domestic assets.
the equality of net exports and net capital outflow
The Equality of Net Exports and Net Capital Outflow
  • Net exports (NX) and net capital outflow (NCO) are closely linked.
  • For an economy as a whole, NX and NCO must balance each other so that:

NCO = NX

    • This holds true because every transaction that affects one side must also affect the other side by the same amount.
saving investment and their relationship to the international flows
Saving, Investment, and Their Relationship to the International Flows
  • Net exports is a component of GDP:

Y = C + I + G + NX

  • National saving is the income of the nation that is left after paying for current consumption and government purchases:

Y - C - G = I + NX

saving investment and their relationship to the international flows17
Domestic Investment

Net Capital Outflow

Saving

=

+

S

I

=

+

NCO

Saving, Investment, and Their Relationship to the International Flows
  • National saving (S) equals Y - C - G so:

S = I + NX

or

figure 2 national saving domestic investment and net foreign investment
Domestic investment

National saving

Figure 2 National Saving, Domestic Investment, and Net Foreign Investment

(a) National Saving and Domestic Investment (as a percentage of GDP)

Percent

of GDP

20

18

16

14

12

10

1960

1965

1970

1975

1980

1985

1990

1995

2000

Copyright © 2004 South-Western

figure 2 national saving domestic investment and net foreign investment19
Net capital

outflow

Figure 2 National Saving, Domestic Investment, and Net Foreign Investment

(b) Net Capital Outflow (as a percentage of GDP)

Percent

of GDP

4

3

2

1

0

–1

–2

–3

–4

1960

1965

1970

1975

1980

1985

1990

1995

2000

Copyright © 2004 South-Western

the prices for international transactions real and nominal exchange rates
THE PRICES FOR INTERNATIONAL TRANSACTIONS: REAL AND NOMINAL EXCHANGE RATES
  • International transactions are influenced by international prices.
  • The two most important international prices are the nominal exchange rate and the real exchange rate.
nominal exchange rates
Nominal Exchange Rates
  • The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another.
nominal exchange rates22
Nominal Exchange Rates
  • The nominal exchange rate is expressed in two ways:
    • In units of foreign currency per one U.S. dollar.
    • And in units of U.S. dollars per one unit of the foreign currency.
nominal exchange rates23
Nominal Exchange Rates
  • Assume the exchange rate between the Japanese yen and U.S. dollar is 80 yen to one dollar.
    • One U.S. dollar trades for 80 yen.
    • One yen trades for 1/80 (= 0.0125) of a dollar.
nominal exchange rates24
Nominal Exchange Rates
  • Appreciation refers to an increase in the value of a currency as measured by the amount of foreign currency it can buy.
  • Depreciation refers to a decrease in the value of a currency as measured by the amount of foreign currency it can buy.
nominal exchange rates25
Nominal Exchange Rates
  • If a dollar buys more foreign currency, there is an appreciation of the dollar.
  • If it buys less there is a depreciation of the dollar.
real exchange rates
Real Exchange Rates
  • The real exchange rate is the rate at which a person can trade the goods and services of one country for the goods and services of another.
real exchange rates27
Real Exchange Rates
  • The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.
    • If a case of German beer is twice as expensive as American beer, the real exchange rate is 1/2 case of German beer per case of American beer.
real exchange rates28
Real Exchange Rates
  • The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies.
real exchange rates29
Real Exchange Rates
  • The real exchange rate is a key determinant of how much a country exports and imports.
real exchange rates30
Real Exchange Rates
  • A depreciation (fall) in the U.S. real exchange rate means that U.S. goods have become cheaper relative to foreign goods.
  • This encourages consumers both at home and abroad to buy more U.S. goods and fewer goods from other countries.
real exchange rates31
Real Exchange Rates
  • As a result, U.S. exports rise, and U.S. imports fall, and both of these changes raise U.S. net exports.
  • Conversely, an appreciation in the U.S. real exchange rate means that U.S. goods have become more expensive compared to foreign goods, so U.S. net exports fall.
a first theory of exchange rate determination purchasing power parity
A FIRST THEORY OF EXCHANGE-RATE DETERMINATION: PURCHASING-POWER PARITY
  • The purchasing-power parity theory is the simplest and most widely accepted theory explaining the variation of currency exchange rates.
the basic logic of purchasing power parity
The Basic Logic of Purchasing-Power Parity
  • Purchasing-power parity is a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.
the basic logic of purchasing power parity34
The Basic Logic of Purchasing-Power Parity
  • According to the purchasing-power parity theory, a unit of any given currency should be able to buy the same quantity of goods in all countries.
basic logic of purchasing power parity
Basic Logic of Purchasing-Power Parity
  • The theory of purchasing-power parity is based on a principle called the law of one price.
    • According to the law of one price, a good must sell for the same price in all locations.
basic logic of purchasing power parity36
Basic Logic of Purchasing-Power Parity
  • If the law of one price were not true, unexploited profit opportunities would exist.
  • The process of taking advantage of differences in prices in different markets is called arbitrage.
basic logic of purchasing power parity37
Basic Logic of Purchasing-Power Parity
  • If arbitrage occurs, eventually prices that differed in two markets would necessarily converge.
  • According to the theory of purchasing-power parity, a currency must have the same purchasing power in all countries and exchange rates move to ensure that.
implications of purchasing power parity
Implications of Purchasing-Power Parity
  • If the purchasing power of the dollar is always the same at home and abroad, then the exchange rate cannot change.
  • The nominal exchange rate between the currencies of two countries must reflect the different price levels in those countries.
implications of purchasing power parity39
Implications of Purchasing-Power Parity
  • When the central bank prints large quantities of money, the money loses value both in terms of the goods and services it can buy and in terms of the amount of other currencies it can buy.
figure 3 money prices and the nominal exchange rate during the german hyperinflation
Figure 3 Money, Prices, and the Nominal Exchange Rate During the German Hyperinflation

Indexes

(Jan. 1921

100)

5

1,000,000,000,000,000

Money supply

10,000,000,000

Price level

100,000

1

Exchange rate

.00001

.0000000001

1921

1922

1923

1924

1925

Copyright © 2004 South-Western

limitations of purchasing power parity
Limitations of Purchasing-Power Parity
  • Many goods are not easily traded or shipped from one country to another.
  • Tradable goods are not always perfect substitutes when they are produced in different countries.
summary
Summary
  • Net exports are the value of domestic goods and services sold abroad minus the value of foreign goods and services sold domestically.
  • Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners.
summary43
Summary
  • An economy’s net capital outflow always equals its net exports.
  • An economy’s saving can be used to either finance investment at home or to buy assets abroad.
summary44
Summary
  • The nominal exchange rate is the relative price of the currency of two countries.
  • The real exchange rate is the relative price of the goods and services of two countries.
summary45
Summary
  • When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen.
  • When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken.
summary46
Summary
  • According to the theory of purchasing-power parity, a unit of currency should buy the same quantity of goods in all countries.
  • The nominal exchange rate between the currencies of two countries should reflect the countries’ price levels in those countries.
ad