Intermediate Macroeconomics Lecture 13
1 Intermediate Macroeconomics Lecture 13
The Open Economy a Why do countries trade with each other? No nation was ever ruined by trade Benjamin Franklin More varieties, higher quality; cheaper price
2 The Open Economy ◼ Why do countries trade with each other? “No nation was ever ruined by trade.” --- Benjamin Franklin More varieties; higher quality; cheaper price
The Open economy a Imports and exports as a of GDP(2002) 160 HK 140 120 a cao 100 80 60 france 40 Japan 20 「m China germany India Korea, U.K. ep EX/GDP口IM/GDP
3 The Open Economy ◼ Imports and exports as a % of GDP (2002) France H K Japan Macao U.S. 0 2 0 4 0 6 0 8 0 100 120 140 160 China Germany India Korea, Rep. U.K. EX/GDP IM/GDP
The Open Economy a The international flows of capital goods a Savings and investment in a small open economy ■ Exchange rates Large open economy
4 The Open Economy ◼ The international flows of capital & goods ◼ Savings and investment in a small open economy ◼ Exchange rates ◼ Large open economy
International flows of k& goods ■ National Identity y=C+l+gu+eX C=Cd+C′I=7+1G=G+G Y=(C-C)+(-1)+(G-G)+EX Y=C++G+EX-(C+/+G′) Y=C+l+g+EX-M Y=C+l+g+NX
5 International Flows of K & Goods ◼ National Identity Y C I G EX d d d = + + + d f C = C +C d f I = I + I d f G = G + G Y C C I I G G EX f f f = ( − ) + ( − ) + ( − ) + ( ) f f f Y = C + I +G + EX − C + I +G Y =C+ I +G+ EX − IM Y =C+ I +G+ NX
International flows of k goods The capital current account Y=C+l+g+M Y-C-G--M=O S-I-=O (I-S)+NX=0
6 International Flows of K & Goods ◼ The capital & current account Y =C+ I +G+NX Y −C−G− I −NX = 0 S − I −NX = 0 (I − S) + NX = 0
International flows of k Goods (I-S)+NX=0 (I-S): capital account NX: current account (S-1): net foreign investment(NFI)
7 International Flows of K & Goods (I-S): capital account NX: current account (S-I): net foreign investment (NFI) (I − S) + NX = 0
International flows of k Goods Net Foreign Investment(NFI) what we lend to foreigners -what we borrow from foreigners(net capital outflows) net capital outflows=NFI= NX= trade balance NFI=-capital account ■S>, net lender ■S<, net borrower
8 International Flows of K & Goods ◼ Net Foreign Investment (NFI) what we lend to foreigners – what we borrow from foreigners (net capital outflows) net capital outflows=NFI = NX= trade balance NFI = -capital account ◼ S>I, net lender ◼ S<I, net borrower
International flows of k goods a Capital and current account balance NX>O current account (trade) surplus →NF|=(S-)>0( ender) >Capital account deficit
9 International Flows of K & Goods ◼ Capital and current account balance NX > 0 current account (trade) surplus →NFI = (S-I) > 0 (lender) →Capital account deficit
Small Open Economy ■ Closed economy: )Output must equal consumption 2) Savings must equal investment ■ Open economy Access to world financial markets Interest rates do not need to clear the domestic financial market 10
10 Small Open Economy ◼ Closed economy: 1) Output must equal consumption 2) Savings must equal investment. ◼ Open economy: → Access to world financial markets → Interest rates do not need to clear the domestic financial market