Mankiw principles of Macroeconomics Chapter 18

Ways that an open economy interacts with other economies:

1. It buys and sells goods and services in world product markets. 2. It buys and sells capital assets such as stocks and bonds in world financial markets.

(New) Export

A foreign national comes to the US and buys lunch. Is this an export or import?

foreign direct investment

American owner actively manages an investment in a foreign country

foreign portfolio investment

American owner buys stock in foreign country - passive investment

Closed Economy

An economy that does not interact with other economies

Open Economy

An economy that interacts freely with other economies around the world

National Saving (S)

An economy's saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow. S=I+NCO

Exports

Domestically produced goods and services that are sold abroad.

Imports

Foreign-produced goods and services that are sold domestically.

Formula GDP

Gross Domestic Product = total Consumer spending + total Investment (spending on goods and services) by businesses + total spending by Government + Net eXports (or Y) GDP=C+I+G+(Ex-Im)

GDP

Gross Domestic Product, prof uses Y in formula

FORMULA Net Exports

Net Exports=Value of country's exports−Value of country's imports. NX=Ex-Im

FORMULA Real Exchange Rate

Real Exchange Rate = (Nominal Exchange Rate * Domestic Price)/ Foreign Price Using a basket : Real Exchange rate = (e (foreign currencies) X P (U.S. basket price index)) / P*(foreign basket price index)

FORMULA National Savings

S=Y-C-G Savings=GDP-Consumption-Government Purchases Other= S=I+NCO Saving=Domestic Investment + Net Capital Outflow

arbitrage

The process of taking advantage of price differences for the same item in different markets

Nominal Exchange Rate

The rate at which a person can trade the currency of one country for the currency of another.

Real Exchange Rate

The rate at which a person can trade the goods and services of one country for the goods and services of another.

Explain how Nominal exchange rate and Real exchange rate are related.

The real exchange rate depends on the nominal exchange rate and on the prices of goods in the two countries measured in the local currencies.

Define net exports and net capital outflow. Explain how they are related.

They are equivalent. If an economy is running a trade deficit, it must be financing the net purchase of goods and services by selling assets abroad. If it's running a trade surplus, the excess in foreign currency it receives is being used to buy assets abroad.

Law of One Price

This law asserts that a good must sell for the same price in all locations. Otherwise, there would be opportunities for profit left unexploited.

purchasing-power parity

This theory states that a unit of a currency must have the same real value in every country.

FORMULA Open Economy

Y=C+I+G+NX

FORMULA Closed Economy

Y=C+I+G; S=I (National Saving = Investment)

Balanced Trade

a situation in which exports equal imports

Trade Surplus

an excess of exports over imports, NX>0 = NCO>0

Trade Deficit

an excess of imports over exports, NX<0 = NCO<0

Net Exports

the difference between the value of its exports and the value of its imports:

Net Capital Outflow (NCO) or Net Foreign Investment

the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

Trade Balance

the value of a nation's exports minus the value of its imports; also called net exports