MGEB05H3 Lecture Notes - Lecture 5: Exchange Rate, Foreign Exchange Market, Loanable Funds

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coppereagle879

16 Sep 2020

School

UTSC

Department

Economics for Management Studies

Course

MGEB05H3

Professor

Iris Au

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Document Summary

This topic looks at open economy in the long run: examine the relationship between the international flows of goods and services (nx) and the international flows of financial capital (nfi). Introduce the nominal exchange rate (e) and the real exchange rate ( ): develop the long-run classical model of a small open economy, which consists of 2 markets. The market for loanable funds and the market for foreign-currency exchange. Determination of trade balance, net foreign investment, national savings, and exchange rate in the long run: discuss the concept of purchasing power parity (ppp). The role of net exports: national income identity for an open economy (topic 1): Y = c + i + g + (ex im) = c + i + g + nx. Nx = y (c + i + g) Trade balance (nx) = exports (of good and services) imports (of goods and service) If nx > 0, the economy runs a trade surplus.

Related Questions

2. Assume that the following characterizes a small open economy: [4 points] Y = 3000, C = 0.6*(Y - T), I = 1000 - 200r, NX = 500 - 500e, r* = 2, G = 1000 ,T = 800.

a. Solve for the equilibrium values of consumption, investment, net exports, net capital outflow, and the real exchange rate.

b. Does this economy have a trade surplus or trade deficit?

c. Is this economy a net borrower or a net lender?

erinshark324

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

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An economy with zero net exports is described below:

C	= 100 + 0.6 (Y 'T)
I ^p	= 70
G	= 120
NX	= 0
T	= 150
The multiplier in this economy is 2.5.

A. Find short-run equilibrium output.

Instruction: Enter your response as an integer value.

Short-run equilibrium output: .

B. Economic recovery abroad increases the demand for the country's exports; as a result, NX rises to 80.

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)decreases/ increases to ________ .

C. Assume that foreign economies are slowing, reducing the demand for the country's exports so that NX = -80. (A negative value of net exports means that exports are less than imports.)

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select)increases/decreases to ___________ .

D. Which of the following best describes the tendency of recessions and expansions to spread across countries?

1. Lower planned aggregate spending in one nation will reduce the amount of goods it exports abroad, thereby lowering the value of imports for its trading partners, which will reduce its short-term equilibrium output as well.

2. Lower planned aggregate spending abroad means that fewer goods will be exported from a specific nation, leaving more goods available for domestic consumption (C) in that nation, which will increase its short-term equilibrium output.

3. Lower planned aggregate spending abroad will reduce the amount of investment that flows into domestic industries from other countries, thereby reducing domestic short-term equilibrium output.

4. Lower planned aggregate spending in a nation means fewer imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

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MGEB05H3 Lecture Notes - Lecture 5: Exchange Rate, Foreign Exchange Market, Loanable Funds

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