Chapter 6. The Open Economy. Glancing at the Appendix

lizardgossypibomaManagement

Oct 28, 2013 (3 years and 8 months ago)

68 views

Chapter 6. The Open Economy.

Glancing at the
Appendix

Old Chapter 5.


Homework
: P.
164
-
65
#1, 2, 3, 7


macromodel

open_economy

#1, 3, 8



Link to
syllabus

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

Table 6.1 p. 137. International Flows of Goods and
Capital, Summary

Figure 6
-
2 p. 142. Saving and Investment in a
Small Open Economy

(More detail next slide).

Figure 6
-
2 p. 142. Saving and Investment in a
Small Open Economy

If r
*

were down here, the country would have a trade deficit.

That’s a good description of the situation in the US today.

r*

NX < 0

The US Balance of Payments, 2007.
(other text)

The US Balance of Payments, 2007.


Table from

another text

Exports minus


Imports

Net Capital


Inflows

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)


0

Figure 6
-
3. P. 143. Fiscal Expansion in a Small Open Economy

If G increases, NX falls; no change in real GDP,
by assumption
.

Fig. 6
-
4 p. 144. Fiscal Expansion Overseas and a
Small Open Economy

How domestic economy is affected by foreign
economic events
.

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.

Fig. 6
-
6 p. 147. The
Trade Balance and
Savings/Investment in
the U.S.

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.


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.

Fig. 6
-
7 p. 152. Net Exports and the Real Exchange Rate

Appreciation

of US $

Depreciation

of US $

Link to
x
-
rates.com

The market for foreign currency in the U.S.

Different
Text!!

The vertical axis in that book is the
inverse

of what it is in the
Mankiw

text.

Fig. 6
-
8 p. 152 Determination of the Real Exchange Rate



Fig. 6
-
8 p. 152. Determination of the Real Exchange Rate,
Viewed as Supply and Demand for Dollars in Europe

=
=

Supply of Dollars:


from net capital outflows from US


---
===========

Quantity of US Dollars

(See discussion alongside the graph in the textbook).

Demand for dollars:

Europe needs dollars to

p
ay for its imports, which

are US
net exports.

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.

Fig. 6
-
10 p. 154. The Impact of Expansionary Fiscal
Policy
Overseas

on the RER

Fig 6
-
11 p. 155. The Impact of an Increase in
Investment on the RER

Fig 6
-
12 p. 156. Impact of Protectionism on the RER

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.
?).

Fig 6
-
14 p. 159. Purchasing Power Parity

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

Summary: Comparison of Analyses of Three
Events, Closed and Open Economies

Chapter 3

C h a p t e r
6

Event

Figure

Figure

Figure

G


3
-
9

Inv.



6
-
3

NX


6
-
9

ԑ



r*


N.A.

6
-
4

NX


6
-
10

ԑ ↓

I
d


3
-
11

I constant;

r


6
-
5

NX


6
-
11

ԑ ↑

Protec
-

tionism

N.A.


6
-
12

ԑ



NX constant

Homework p 151

1.
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?




Figure 5.15 P. 154
How the Net Capital Outflow
Depends on the Interest Rate


Mankiw
: Macroeconomics, Seventh Edition

Copyright © 2010 by Worth Publishers

Figure 5.16 p. 154
Two Special Cases

Appendix

previous edition

Figure 5.17 p. 156.
The Market for
Loanable

Funds
in the Large Open Economy



Figure 5.18 p. 156.
The Market for Foreign
-
Currency Exchange in the Large Open Economy

Figure 5.19 p. 157.
The Equilibrium in the Large Open Economy

Figure 5.20 p. 159.
A Reduction in National Saving
in the Large Open Economy

2010
by Worth Publishers

Figure 5.21 p. 159.
An Increase in Investment Demand in
the Large Open Economy


Mankiw
: Macroeconomics, Seventh Edition

Copyright © 2010 by Worth Publishers

Figure 5.22 p. 160
An Import Restriction in the
Large Open Economy

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

Figure 5.16 (a)
Two Special Cases

Mankiw
: Macroeconomics, Seventh Edition

Copyright © 2010 by Worth Publishers

Figure 5.16 (b)
Two Special Cases

Mankiw: Macroeconomics, Seventh Edition

Copyright © 2010 by Worth Publishers