Lecture 5 The open Economy, Unemployment 1

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

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

Lecture 5. The Open Economy 4

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

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

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

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

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

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

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

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

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

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

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

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

Lecture 5. The Open Economy 19 PPP

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

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

Lecture 5. Unemployment 23 Frictional Unemployment Structural Unemployment

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

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Lecture 5. Unemployment 27

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