1. Chapter 6. The Open Economy. Glancing at the Appendix
Old Chapter 5.
Homework: P #1, 2, 3, 7
macromodel open_economy #1, 3, 8
Link to syllabus
Chapter 6. The Open Economy
Homework: P #1, 2, 3, 7
macromodel 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 < 0
If 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 from
another text
Exports minus
Imports
Net Capital
Inflows
The US Balance of Payments, Table 18-2, p. 495 ≈0
Point is that: current account + financial (capital) account ≈ 0
or, 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 Economy
How 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. 142
Figure Figure 6.3
p p. 143
Crowding 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 Rate
If the price of US exported wheat is $100/ton, then the price in
England 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
Appreciation
of US $
Depreciation
of US $
Fig. 6-7 p Net Exports and the Real Exchange Rate
With arrows included, and link to x-rates.com
Link 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 US
Demand for dollars:
Europe needs dollars to
pay for its imports, which
are 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. ?).

23. Fig 6-14 p. 159. Purchasing Power Parity

24. Table 6-2 p. 161. Big Macs and PPP

25. Summary: Comparison of Analyses of Three Events, Closed and Open Economies
Chapter 3
C h a p t e r 6
Event
Figure
G ↑
3-9
Inv. ↓
6-3
NX ↓
6-9
ԑ ↑
r*↑
N.A.
6-4
NX ↑
6-10
ԑ ↓
Id ↑
3-11
I constant;
r ↑
6-5
6-11
Protec-
tionism
6-12
NX constant
Summary Table

26. Homework p 151 Use model of SOE to predict what will happen if:
a. A fall in consumer confidence reduces consumption, raises saving
b. Taste change leads us to want more Toyotas, fewer Fords
c. Introduction of automatic teller machines lowers demand for M.
3. Town of Leverett is an SOE. A change in fashion results in a decline
in demand for their exports.
What happens to Leverett exports, saving, interest rate, exchange rate
Will 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 government
deficit (T – G) or changes in personal saving, which will be affected
by 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 money
supply of changes in either cr or rr.

28. Appendix

29. Figure 6.20 P. 171 How the Net Capital Outflow Depends on the Interest Rate

30. Figure 5.16 p. 154 Two Special Cases
Closed economy, CF=0, and is independent of real interest rates
SOE, CF is unlimited at r*
Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers

31. Appendix –previous edition

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

37. Figure 5.22 p. 160 An Import Restriction in the Large Open Economy
Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers

38. Figure 5.23 p. 161. A Fall in the Net Capital Outflow in the Large Open Economy
Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers

41. Figure 5.16 (a) Two Special Cases Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers

42. Figure 5.16 (b) Two Special Cases Mankiw: Macroeconomics, Seventh Edition Copyright © 2010 by Worth Publishers