Chapter 6

Report
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
r*
NX < 0
*
If r were down here, the country would have a trade deficit.
That’s a good description of the situation in the US today.
The US Balance of Payments, 2007. (other text)
The US Balance of Payments, 2007.
Table from
another text
Exports minus
Imports
Net Capital
Inflows
≈0
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)
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.
Figure 3.8
p. 71
Figure 3.9
p. 72
Crowding out of investment
Figure 6.2
p. 142
Figure 6.3
p. 143
Crowding out of 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.
Depreciation
of US $
Appreciation
of US $
Fig. 6-7 p. 152. Net Exports and the Real Exchange Rate
Link to x-rates.com
Different Text!!
The market for foreign currency in the U.S.
The vertical axis in that book is the inverse of what it is in the Mankiw tex
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
Demand for dollars:
Europe needs dollars to
pay for its imports, which
are US net exports.
(See discussion alongside the graph in the textbook).
---===========
Quantity of US Dollars
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
Event
G↑
r*↑
Id ↑
Protectionism
Chapter 3
Figure
3-9 Inv. ↓
N.A.
3-11 I constant;
r↑
N.A.
Figure
6-3
6-4
6-5
Chapter 6
Figure
NX ↓
6-9
NX ↑ 6-10
NX ↓ 6-11
6-12
ԑ↑
ԑ↓
ԑ↑
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?
Further study guide hints: Chapters 3 and 6
S – national savings – can be affected by changes in the government
deficit (T – G) or changes in personal saving, which will be affected
by demographic factors like age, but not redistribution (Robin Hood).
I is affected by technology, ‘animal spirits’, business taxes. In Chapt 6,
I is also affected by the international (real) interest rate.
NX – net exports – is affected by tariffs and technology.
Also, for chapter 4, where the money multiplier = (1 + cr)/(rr + cr)
there are obvious leads to trace through the impact on the money
supply of changes in either cr or rr.
Appendix
Figure 6.20 P. 171 How the Net Capital Outflow
Depends on the Interest Rate
Figure 5.16 p. 154 Two Special Cases
Mankiw: Macroeconomics, Seventh Edition
Copyright © 2010 by Worth Publishers
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 ForeignCurrency 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
Figure 5.21 p. 159. An Increase in Investment Demand in
the Large Open Economy
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
Figure 5.16 (b) Two

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