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Lecture 5 The open Economy, Unemployment 1. Lecture 5. The Open Economy, Unemployment 2 1. To acquaint students with the terminology necessary for understanding.

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Presentation on theme: "Lecture 5 The open Economy, Unemployment 1. Lecture 5. The Open Economy, Unemployment 2 1. To acquaint students with the terminology necessary for understanding."— Presentation transcript:

1 Lecture 5 The open Economy, Unemployment 1

2 Lecture 5. The Open Economy, Unemployment 2 1. To acquaint students with the terminology necessary for understanding the open economy. 2. To provide a simple model of international flows of capital and goods, emphasizing that these ultimately depend upon the determinants of saving and investment. 3. To present a simple model of the real exchange rate, emphasizing its role in ensuring that the current account and the capital account sum to zero. 4. To explain the determination of the nominal exchange rate. The Open Economy

3 Lecture 5. The Open Economy 3 Flows of goods and services between nations Financial flows between nations

4 Lecture 5. The Open Economy 4

5 5

6 6

7 7 Saving and Investment in a Small Open Economy Capital Mobility and the World Interest Rate Why Assume a Small Open Economy? The Model

8 Lecture 5. The Open Economy 8 Lucas Paradox: Why does not capital flow from developed countries to developing countries?

9 Lecture 5. The Open Economy 9 Exchange Rates Nominal and Real Exchange Rates The Real Exchange Rate and the Trade Balance The Determinants of the Real Exchange Rate

10 Lecture 5. The Open Economy 10 The Determinants of the Real Exchange Rate

11 Lecture 5. The Open Economy 11 The Determinants of the Real Exchange Rate

12 Lecture 5. The Open Economy 12 Exchange Rates Nominal and Real Exchange Rates The Real Exchange Rate and the Trade Balance The Determinants of the Real Exchange Rate How Policies Influence the Real Exchange Rate

13 Lecture 5. The Open Economy 13 How Policies Influence the Real Exchange Rate

14 Lecture 5. The Open Economy 14 How Policies Influence the Real Exchange Rate

15 Lecture 5. The Open Economy 15 How Policies Influence the Real Exchange Rate

16 Lecture 5. The Open Economy 16 How Policies Influence the Real Exchange Rate

17 Lecture 5. The Open Economy 17 Exchange Rates Nominal and Real Exchange Rates The Real Exchange Rate and the Trade Balance The Determinants of the Real Exchange Rate How Policies Influence the Real Exchange Rate The Determinants of the Nominal Exchange Rate

18 Lecture 5. The Open Economy 18 Inflation and Nominal Exchange Rate

19 Lecture 5. The Open Economy 19 PPP

20 Lecture 5. The Open Economy, Unemployment To show that unemployment is the natural consequence of labor force dynamics and that the rate of unemployment is determined by the rates of job separation and job finding. 2. To discuss how the process of job search leads to frictional unemployment and how government policies such as unemployment insurance influence the amount of frictional unemployment. 3. To discuss how wage rigidity leads to structural unemployment and also the various causes of wage rigidity (minimum wages, unions, and efficiency wages). 4. To teach some of the important facts about patterns of unemployment in the United States and in Europe. Unemployment

21 Lecture 5. Unemployment 21

22 Lecture 5. Unemployment 22 Job finding rate – f Separation rate – s

23 Lecture 5. Unemployment 23 Frictional Unemployment Structural Unemployment

24 Lecture 5. Unemployment 24

25 Lecture 5. Unemployment 25 Frictional Unemployment Structural Unemployment o Minimum wage laws o Unions and Collective Bargaining o Efficiency Wages

26 Lecture 5. Unemployment 26

27 Lecture 5. Unemployment 27

28 Lecture 5. Unemployment 28


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