1. © 2007 Thomson South-Western

2. Open-Economy Macroeconomics: Basic Concepts Open and Closed Economies –A closed economy ( 封閉經濟 )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( 開放經濟 ) is one that interacts freely with other economies around the world.

3. © 2007 Thomson South-Western Open-Economy Macroeconomics: Basic Concepts 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.

4. © 2007 Thomson South-Western THE INTERNATIONAL FLOW OF GOODS AND CAPITAL The Flow of Goods: Exports, Imports, and Net Exports –The United States is a very large and open economy — it imports and exports huge quantities of goods and services. –Taiwan is a small and very open economy-it exports and imports large quantities of goods and services. –Over the past four decades, international trade and finance have become increasingly important.

5. © 2007 Thomson South-Western 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. 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( 貿易餘額 ).

6. © 2007 Thomson South-Western The Flow of Goods: Exports, Imports, Net Exports A trade deficit( 貿易赤字 ) is a situation in which net exports (NX) are negative. –Imports > Exports A trade surplus ( 貿易盈餘 )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.

7. © 2007 Thomson South-Western The Flow of Goods: Exports, Imports, Net Exports Factors That Affect Net Exports – 偏好： The tastes of consumers for domestic and foreign goods and services. – 國內外商品價格： The prices of goods at home and abroad. – 匯率： The exchange rates at which people can use domestic currency to buy foreign currencies.

8. © 2007 Thomson South-Western The Flow of Goods: Exports, Imports, Net Exports Factors That Affect Net Exports (continued) – 所得購買力： The incomes of consumers at home and abroad. – 運輸成本： The costs of transporting goods across border. – 貿易政策： The policies of the government toward international trade.

9. © 2007 Thomson South-Western The Internationalization of the U.S. Economy Percent of GDP 0 5 10 15 1950 51960196519701975198019901985200020051995 Imports Exports

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11. The Flow of Financial Resources: Net Capital Outflow Net capital outflow ( 淨資本流出， NCO) refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. When a Taiwan resident buys stock in Intel, the purchase raises Taiwan net capital outflow. When a Japanese residents buys a bond issued by the Taiwan ’ s government, the purchase reduces the Taiwan ’ s net capital outflow.

12. © 2007 Thomson South-Western The Flow of Financial Resources: Net Capital Outflow Variables that Influence Net Capital Outflow – 國內實質利率： – 國內實質利率： The real interest rates being paid on foreign assets. – 國外實質利率： – 國外實質利率： The real interest rates being paid on domestic assets. – 國外政經風險： – 國外政經風險： The perceived economic and political risks of holding assets abroad. – 政府政策： – 政府政策： The government policies that affect foreign ownership of domestic assets.

13. © 2007 Thomson South-Western 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 National saving (S) equals Y – C – G, so: S = I + NX In a closed economy, NX=0 and hence: S = I

14. © 2007 Thomson South-Western The Equality of Net Exports and Net Capital Outflow 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 of this equation also affects the other side by exactly the same amount.

15. © 2007 Thomson South-Western The Equality of Net Exports and Net Capital outflow Imagine that you are a sales person residing in Taiwan. One day, you sell ten bikes to a U.S. customer for 10,000 U.S. dollars. This sale is an export of Taiwan, so it increases Taiwan net exports by 10,000 U.S. dollars. If you decide to use the proceeds to purchase the INTEL stock. Then you, as a domestic resident, purchase and own foreign assets.

16. © 2007 Thomson South-Western The Equality of Net Exports and Net Capital outflow The purchase of INTEL stock increases Taiwan net capital outflow by 10,000 U.S. dollars. If you use 10,000 U.S. dollars to a good made in U.S., then Taiwan imports will increase by 10,000 U.S. dollars. And the net capital flow does not change. If you go to a local bank to exchange 10,000 U.S. dollars for N.T. dollars. But this does not change the situation because the bank has to do something with the 10,000 U.S. dollars.

17. © 2007 Thomson South-Western International Flows of Goods and Capital: Summary

18. © 2007 Thomson South-Western 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 519951990198519801975197020002005 National saving Domestic investment

19. © 2007 Thomson South-Western National Saving, Domestic Investment, and Net Foreign Investment (b) Net Capital Outflow (as a percentage of GDP) Percent of GDP 2 6 5 4 3 2 1 0 1 1960 519951990198519801975197020002005 Net capital outflow

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22. 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( 各目匯率 ) and the real exchange rate( 實質匯率 ).

23. © 2007 Thomson South-Western 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 Rates

24. © 2007 Thomson South-Western Nominal Exchange Rates The nominal exchange rate is expressed in two ways: –In units of foreign currency per one N.T. dollar. –In units of N.T. dollars per one unit of the foreign currency. Assume the exchange rate between the N.T. dollar and U.S. dollar is 33 N.T. dollars to one U.S. dollar. –One U.S. dollar trades for 33 N.T. dollars. –One N.T. dollar trades for 1/33 (= 0.0303) of a U.S. dollar.

25. © 2007 Thomson South-Western Nominal Exchange Rates Appreciation ( 貨幣升值 ) refers to an increase in the value of a currency as measured by the amount of foreign currency it can buy. Depreciation ( 貨幣貶值 ) refers to a decrease in the value of a currency as measured by the amount of foreign currency it can buy. If one N.T. dollar buys more foreign currency, there is an appreciation of the N.T. dollar. If it buys less there is a depreciation of the N.T. dollar.

26. © 2007 Thomson South-Western Real Exchange Rates The real exchange rate is the rate at which a person can trade one basket of the goods and services of one country for units of the same basket of the goods and services of another country.

27. © 2007 Thomson South-Western 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. The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies.

28. © 2007 Thomson South-Western Real Exchange Rates The real exchange rate is a key determinant of how much a country exports and imports. Real exchange rate = Nominal exchange rate Domestic price Foreign price

29. © 2007 Thomson South-Western Real Exchange Rates A depreciation (fall) in the Taiwan real exchange rate means that Taiwan goods have become cheaper relative to foreign goods. This encourages consumers both at home and abroad to buy more Taiwan goods and fewer goods from other countries.

30. © 2007 Thomson South-Western Real Exchange Rates As a result, Taiwan exports rise, and Taiwan imports fall, and both of these changes raise Taiwan net exports. Conversely, an appreciation in the Taiwan real exchange rate means that Taiwan goods have become more expensive compared to foreign goods, so Taiwan net exports fall.

31. © 2007 Thomson South-Western A FIRST THEORY OF EXCHANGE-RATE DETERMINATION: PURCHASING-POWER PARITY The purchasing-power parity theory( 購買力平價稅 ) is the simplest and most widely accepted theory explaining the variation of currency exchange rates. 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.

32. © 2007 Thomson South-Western 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. 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. 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.

33. © 2007 Thomson South-Western The 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 Nominal exchange rate Domestic price Foreign price

34. © 2007 Thomson South-Western 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. Foreign price Domestic price Nominal exchange rate =

35. © 2007 Thomson South-Western 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.

36. © 2007 Thomson South-Western Money, Prices, and the Nominal Exchange Rate During the German Hyperinflation 10,000,000,000 1,000,000,000,000,000 100,000 1.00001.0000000001 1921192219231924 Exchange rate Money supply Price level 1925 Indexes (Jan. 1921 = 100)

37. © 2007 Thomson South-Western 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.

38. © 2007 Thomson South-Western 全球化對工作機會與薪資所得的影響 1. 八○年代中期以前，經濟、出口與薪資所得同步 成長，但九○年代以後，薪資所得成長遠遠落後於 經濟成長與出口成長 2. 九○年代開始，資金與技術跨國移動障礙一一移 除。台商赴中國投資、生產等同於「台商以中國 勞工取代台灣勞工」的跨國勞動替代現象，導致 台灣製造業及服務業薪資所得不成長，勞資雙方 議價能力出現不對稱現象。

39. © 2007 Thomson South-Western 2000 年後台灣對中國貿易（出口）依存度快速增加 (1992-2008)

40. © 2007 Thomson South-Western 2000 年後台商投資中國金額占我國 GDP 比重持續上升

41. © 2007 Thomson South-Western 我國對外投資以投資中國比重最高

42. 各國對中國投資占其對外投資比重

43. 2000 年後，出口再度成為台灣經濟成長的主要動力

44. © 2007 Thomson South-Western 2000 年後，淨出口成為台灣經濟成長最重要 的源泉

45. © 2007 Thomson South-Western 經濟成長未能反映在家庭可支配所得成長

46. 每戶就業人數隨可支配所得而下降

47. 家庭儲蓄能力隨可支配所得而下降

48. Summary © 2007 Thomson South-Western 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.

49. Summary © 2007 Thomson South-Western 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.

50. Summary © 2007 Thomson South-Western 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.

51. Summary © 2007 Thomson South-Western 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.

52. Summary © 2007 Thomson South-Western 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.