Choose the larger atom from each pair.
a. Sn or Si
b. Br or Ga
c. Sn or Bi
d. Se or Sn
Chapter 18- Open Economy Monday, April 4, 2016 5:00 PM 1. Intro a. Trade can make everyone better off b. This chapter introduces basic concepts of international macroeconomics i. The trade balance (trade deficits, surpluses) ii. International flows of assets iii. Exchange rates 2. Closed vs. Open Economies a. A closed economy does not interact with other economies in the world b. An open economy interacts freely with other economies around the world 3. The flow of goods and services a. Exports: i. Domestically-produced g&s sold abroad b. Imports: i. Foreign-produced g&s sold domestically c. Net Exports (NX), aka the trade balance i. =value of exports - value of imports 4. Examples: a. Canada experiences a recession i. U.S. net exports would fall 1) Due to a fall in Canadian consumers purchases of U.S. exports b. U.S. consumers decide to be patriotic and buy more products "made in the U.S.A" i. U.S. net exports rise 1) Due to a fall in imports c. Prices of Mexican goods rise faster than prices of U.S. goods i. U.S. net exports rise 1) Exports to Mexico increase, Imports from Mexico decrease 5. Variables that influence Net Exports a. Consumer preferences for foreign and domestic goods b. Prices of goods at home and abroad c. Incomes of consumers at home and abroad d. The exchange rates at which foreign currency trades for domestic currency e. Transportation costs f. Government policies 6. Trade surpluses and Deficits ○ NX measures the imbalance in a country's trade in goods and services Trade deficit: □ An excess of imports over exports, NX<0 and Y0 and Y>C+I+G Balanced trade: □ When exports= imports, NX=0 and Y= C+I+G Table 1, page 380 (KNOW THIS STUFF!!) 7. The Increasing openness of the U.S. Economy a. Increasing importance of international trade and finance i. 1950s, imports and exports: 4-5% of GDP ii. Recent years: 1) Exports- increased more than twice 2) Imports- increased more than three times b. Increase in international trade i. Improvements in transportation i. Improvements in transportation ii. Advances in telecommunications iii. Technological progress iv. Government's trade policies 1) NAFTA 2) GATT 8. The Flow of Capital a. Net capital Outflow (NCO): i. Domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets b. NCO is also called net foreign investment c. Flow of capital abroad takes two forms: i. Foreign direct investment: 1) Domestic residents or firms set up a foreign subsidiary and actively manage the foreign investment, such as, McDonalds opens a fast-food outlet in Moscow, Disney builds a theme park in Hong Kong ii. Foreign Portfolio investment: 1) Domestic residents purchase foreign stocks or bonds, supplying "loanable funds" to a foreign firm, such as, an American buys stock in Toyota ○ NCO measures the imbalance in a country's trade in assets When NCO>0, "capital outflow" □ Domestic purchases of foreign assets exceed foreign purchases of domestic assets When NCO<0, "capital inflow" □ Foreign purchases of domestic assets exceed domestic purchases of foreign assets d. Variables that influence NCO i. Real interest rates paid on foreign assets ii. Real interest rates paid on domestic assets iii. Perceived risks of holding foreign assets iv. Govt policies affecting foreign ownership of domestic assets 9. The Equality of NX and NCO a. An Accounting identity: NCO=NX i. Arises because every transaction that affects NX also affects NCO by the same amount (and vice versa) 10. When a foreigner purchases a good from the U.S. a. The us exports and NX increases b. The foreigner pays with currency or assets, so the U.S. acquires some foreign assets, causing NCO to rise. 11. Saving, Investment, and International Flows of Goods & Assets a. Accounting Identity i. Y=C+I+G+NX b. Rearranging terms i. Y-C-G=I+NX c. Since S=Y-C-G i. S=I+NX d. Since NX=NCO i. S=I+NCO S=National Savings 1) Thus, in an open economy, S=I+NCO I= Domestic Investment 2) Then S-I=NCO and NX 3) When S>I, Then NCO>0 and the excess loanable funds flow abroad in the form of positive net capital outflow. (Trade Surplus) 4) When S