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Chapter 12 notes.docx

4 Pages

Course Code
ECN 204
Christos Shiamptanis

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Chapter 12 OpenEconomy Macroeconomic Basic ConceptsClosed VS Open Economies Closed economydoes not interact with other economies in the worldOpen economyinteracts freely with other economies around the world It buys and sells goods and services in world product markets Its buys and sells capital assets in world financial markets How are international flows if goods and assets relatedThe flows of goods and services Exports domesticallypriduced GS abroad Importsforeignproduced GS sold domestically Net exports NX aka the trade balancevalue of exportsvalue of importsWhat do you think would happen to Canadian net exports ifA The US experiences a recession falling incomes rising unemploymentCanadian net exports would fall due to a fall in American consumers purchases of Canadian exportsB Canadian consumers decide to be patriotic and buy more products Made in Canada Canadian net exports would rise due to a fall in importsC Prices of goods produced in Mexico rise faster than prices of goods produced in CanadaThis makes Canadian goods more attractive relative to Mexicos goods Exports to Mexico increaseimports from Mexico decrease so Canadian net exports increase Variables that Influence Net ExportsConsumers preferences for foreign and domestic goodsPrices of goods at home and abroadIncomes of consumers at home and abroadThe exchange rates at which foreign currency trades for domestic currencyTransportation costsGovt policiesTrade SurplusesDeficits NX measures the imbalance in a countrys trade in goods and services Trade deficit an excess of imports over exportsTrade surplus an excess of exports over importsBalanced trade when exportsimportsThe Flow of CapitalNet capital outflow NCOdomestic residents purchases of foreign assets minus foreigners purchases of domestic assetsNCO is also called net foreign investmentWhen a Canadian resident buys stock in Telmex the Mexican phone company the purchase raises Canadian net capital outflowWhen a Japanese resident buys a bond issued by the Canadian government the purchase reduces Canadian net capital outflow The flow of capital abroad takes two formsForeign direct investmentDomestic residents actively manage the foreign investment eg Tim Hortons opens a fast food outlet in Russia that is an example of foreign direct investmentForeign portfolio investmentDomestic residents purchase foreign stocks or bonds supplying loanable funds to a foreign firm
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