Textbook Guide Economics: The Residents

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1 Dec 2016
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Open-Economy Macroeconomics Basic Concepts
The Flow of Goods: Exports, Imports and Net Exports
Exports are goods and services produced domestically and sold
internationally.
Imports are good and services that are produced internationally and sold
domestically.
Net exports, also called the trade balance is the value of a nation’s
exports minus the value of its imports.
A trade surplus occurs when exports exceed imports.
A trade deficit occurs when imports exceed exports.
Balanced trace occurs when imports = exports.
The figure above shows imports and exports as a percentage of the GDP
of the United States. The increases over time show the importance of
international trade.
The Flow of Financial Resources
Net capital outflow = purchase of foreign assets by domestic residents
purchase of domestic assets by foreigners.
Saving, Investment, and Their Relationship to the International Flows
Remember that Y=C+I+G+NX
o Y=GDP
o C=consumption
o I=investment
o G=government spending
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o NX=net exports
This equation shows the relationship of each of these components to GDP.
Nominal Exchange Rates
The nominal exchange rate is the rate at which a person can trade the
currency from one country for currency of another.
Appreciation is an increase in value of a currency as measured by the
amount of foreign currency it can buy.
Depreciation is a decrease in the value of a currency as measured by the
amount of foreign currency it can buy.
Real Exchange Rates
The real exchange rate is the rate at which a person can trade the goods
and services of one country for the goods and services of another country.
Real exchange rate = (nominal exchange rate x domestic price) / foreign
price
Purchasing-Power Parity
Purchasing-power parity is a theory of exchange rates where a unit of
any given currency should be able to buy the same quantity of goods in all
countries.
Many economists believe that this describes market forces that determine
exchange rates in the long run.
The basic assumption is that if a good is not selling for the same price in all
location then there would be opportunities for profit which would then be
exploited. This exploitation would then level off all prices in the long run.
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