Presentation on theme: "Chapter 6. The Open Economy. Glancing at the Appendix"— Presentation transcript:
1 Chapter 6. The Open Economy. Glancing at the Appendix Old Chapter 5.Homework: P #1, 2, 3, 7macromodel open_economy #1, 3, 8Link to syllabusChapter 6. The Open EconomyHomework: P #1, 2, 3, 7macromodel open_economy #1, 3, 8
2 Fig. 6-1 p. 134. Imports and Exports as % of GDP, 2010 Trade is smaller (relative to GDP) in US than elsewhere.Note sizeable US trade deficit
3 Table 6.1 p. 137. International Flows of Goods and Capital, Summary
4 Figure 6-2 p. 142. Saving and Investment in a Small Open Economy (More detail next slide).
5 Figure 6-2 p. 142. Saving and Investment in a Small Open Economy Figure 6-2 p Saving and Investment in a Small Open Economy - showing situation of US today.NX < 0If r* were down here, the country would have a trade deficit.That’s a good description of the situation in the US today.
6 The US Balance of Payments, 2007. (other text) The US Balance of Payments, Table 18-2, p. 495
7 The US Balance of Payments, 2007. Table fromanother textExports minusImportsNet CapitalInflowsThe US Balance of Payments, Table 18-2, p. 495≈0Point is that: current account + financial (capital) account ≈ 0or, net exports = - financial account = - net capital inflows= net capital outflows. NX = S – I . (Mankiw, p. 136)
8 Figure 6-3. P. 143. Fiscal Expansion in a Small Open Economy If G increases, NX falls; no change in real GDP, by assumption.
9 Fig. 6-4 p. 144. Fiscal Expansion Overseas and a Small Open Economy Fig. 6-4 p Fiscal Expansion Abroad and a Small Open EconomyHow domestic economy is affected by foreign economic events.
10 Fig. 6-5 p. 145. Shift of the Investment Curve in a Small Open Economy An increase in the demand for domestic investment lowers net exports.
11 Figure Figure 6.2 p p. 142Figure Figure 6.3p p. 143Crowding out of investment Crowding out of exports
12 Fig. 6-6 p. 147. The Trade Balance and Savings/Investment in the U.S.
13 Fig. 6-7 p. 152. Net Exports and the Real Exchange Rate Why? Consider the real exchange rate between US and UK. In this case ɛ= £/$ x PUS/PUK.Suppose the exchange rate £/$ increases from 0.8 £/$ to 1.4 £/$.This would cause US exports to fall.Fig. 6-7 p Net Exports and the Real Exchange RateIf the price of US exported wheat is $100/ton, then the price inEngland of US wheat will rise from £80 to £140 [$100 x 0.8 £/$].So England will buy less US wheat, and our net exports will fall.An increase on the vertical axis causes a leftward movement along the horizontal axis.
14 Fig. 6-7 p. 152. Net Exports and the Real Exchange Rate Appreciationof US $Depreciationof US $Fig. 6-7 p Net Exports and the Real Exchange RateWith arrows included, and link to x-rates.comLink to x-rates.com
15 The market for foreign currency in the U.S. Different Text!!The market for foreign currency in the U.S.The Market for foreign currency(Different Text)Can have fixed exchange rates, flexible rates.Appreciation, depreciation.Purchasing power parity.. Exchange rates equate the purchasing power of currencies.Effects of: tastes, relative incomes, relative prices, interest rates, speculation.The vertical axis in that book is the inverse of what it is in the Mankiw text.
16 Fig. 6-8 p. 152 Determination of the Real Exchange Rate Fig. 6-8 p Determination of the the Real Exchange Rate
17 Fig. 6-8 p Determination of the Real Exchange Rate, Viewed as Supply and Demand for Dollars in Europe== Supply of Dollars:from net capital outflows from USDemand for dollars:Europe needs dollars topay for its imports, whichare US net exports.Fig. 6-8 p Determination of the Real Exchange Rate, viewed as supply an demand for dollars in Europe.---===========Quantity of US Dollars(See discussion alongside the graph in the textbook).
18 Fig 6-9, p. 153. Impact of Expansionary Fiscal Policy on the RER If G increases, NX falls: same result as Figure 6.3. This shows x-rate.
19 Fig. 6-10 p. 154. The Impact of Expansionary Fiscal Policy Overseas on the RER
20 Fig 6-11 p. 155. The Impact of an Increase in Investment on the RER
21 Fig 6-12 p. 156. Impact of Protectionism on the RER
22 Fig. 6-13 p. 158. Inflationary Differentials and the Nominal Exchange Rate Graphing %∆e and (π* - π), which is related to%∆e = %∆ ε + (π* - π), supposing %∆ ε is small. (p. 144).Graphing %∆e and (π* - π), which is related to%∆e = %∆ ε + (π* - π), supposing %∆ ε is small. (p. ?).
25 Summary: Comparison of Analyses of Three Events, Closed and Open Economies Chapter 3C h a p t e r 6EventFigureG ↑3-9Inv. ↓6-3NX ↓6-9ԑ ↑r*↑N.A.6-4NX ↑6-10ԑ ↓Id ↑3-11I constant;r ↑6-56-11Protec-tionism6-12NX constantSummary Table
26 Homework p 151 Use model of SOE to predict what will happen if: a. A fall in consumer confidence reduces consumption, raises savingb. Taste change leads us to want more Toyotas, fewer Fordsc. Introduction of automatic teller machines lowers demand for M.3. Town of Leverett is an SOE. A change in fashion results in a declinein demand for their exports.What happens to Leverett exports, saving, interest rate, exchange rateWill this encourage or discourage foreign travel from Leverettines.What could the L. gov’t do to taxes, to maintain previous x-rate?
27 Further study guide hints: Chapters 3 and 6 S – national savings – can be affected by changes in the governmentdeficit (T – G) or changes in personal saving, which will be affectedby demographic factors like age, but not redistribution (Robin Hood).I is affected by technology, ‘animal spirits’, business taxes. In Chapt 6,I is also affected by the international (real) interest rate.NX – net exports – is affected by tariffs and technology.Also, for chapter 4, where the money multiplier = (1 + cr)/(rr + cr)there are obvious leads to trace through the impact on the moneysupply of changes in either cr or rr.
32 Figure 5.17 p. 156. The Market for Loanable Funds in the Large Open Economy
33 Figure 5.18 p. 156. The Market for Foreign-Currency Exchange in the Large Open Economy
34 Figure 5.19 p. 157. The Equilibrium in the Large Open Economy
35 Figure 5.20 p. 159. A Reduction in National Saving in the Large Open Economy If G increases, National savings declines, interest rates increase, this reduces net capital outflow, which raises (appreciates) the RER and lowers net exports.Can be seen as a combination of closed economy and a Small open economy.
36 Figure 5.21 p. 159. An Increase in Investment Demand in the Large Open Economy If I increases because of lower business taxes, the interest rates rise, capital outflow falls, the RER increases/appreciates, and net exports fall.2010 by Worth Publishers