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Macroeconomics 18.docx

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ECON 201

Macroeconomics Chapter 18  Closed economy: an economy that doesn’t interact with other economies in the world  Open economy: an economy that interacts freely with other economies around the world.  The Flow of goods: exports, imports, and net exports  Exports: goods and services that are produced domestically and sold abroad.  Imports: goods and services that are produced abroad and sold domestically.  Net exports: the value of a nation’s exports minus the value of its imports (trade balance)  (+) – country sells more than it buys [trade surplus: excess of exports over imports]  (-) – country buys more than it sells [trade deficit: excess of imports over exports]  Balanced trade: exports equal imports.  International trade increase because of transportation (cheaper and more efficient) and telecommunications, which help reach consumers easier.  Technological progress (films), government trade policies allowed  The flow of financial resources: net capital flow  Net capital outflow: the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners  (+): domestic residents are buying more foreign assets than foreigners are buying domestic assets. [capital flowing out of economy]  (-):domestic residents are buying less foreign assets than foreigners are buying domestic assets. [capital flowing into the economy-inflow]  Foreign direct investment: mcdonalds opens in Russia (active role in investment)  Foreign portfolio investment:American buys stock in a Russian corporation (passive role in investment)  Equality of Net Exports and Net Capital Outflow  Net capital outflow must always equal net exports  NCO = NX  When running a trade surplus (NX > 0), it uses foreign currency to buy foreign assets and capital flows out of the countr
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