Open-Economy Macroeconomics Notes

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Ch28 “Open-Economy Macroeconomics”

FOREIGN TRADE AND ECONOMIC ACTIVITY Imports  goods and services produced abroad and consumed domestically Exports  goods and services produced domestically and purchased by foreigners Net exports  defined as exports of goods and services minus imports of goods and services Net foreign investment  counterpart of net exports Denotes net US savings abroad and is approximately equal to the value of net exports  



appreciation in the exchange rate and a corresponding decline in net exports; monetary easing does the opposite. The impact of changes in interest rates on net exports reinforces the impact on domestic investment In a full-employment closed economy (always holding other things constant), higher government spending, lower taxes, or lower desired private saving will raise the real interest rate and lower equilibrium saving and investment net exports are determined by the difference between national saving and national investment, which is determined by domestic factors plus the world interest rate changes in exchange rates  are the mechanism by which saving and investment adjust

Domestic expenditures  equal to consumption plus domestic investment plus government purchases

Examples of open-economy saving-investment theory in the small open economy an increase in private saving or lower government spending will increase national saving; this will lead to a depreciation of the exchange rate until net exports have increased enough to balance the increase in domestic saving an increase in domestic investment, say, because of an improved business climate or a burst of innovations, will lead to a shift in the investment schedule; this will lead to an appreciation of the exchange rate until net exports decline enough to balance saving and investment. In this case, domestic investment crowds out foreign investment an increase in world interest rates will reduce the level of investment. This will lead to an...
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