Chapter 34 - Open-market macroeconomics. After studying this chapter you will be able to understand: How to define balance of trade, portfolio investment, and foreign direct investment? What the relationship is between balance of trade and net capital outflow? What the determinants of international capital flows are?. | Chapter 34 Open-Market Economics © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • How to define balance of trade, portfolio investment, and foreign direct investment. • What the relationship is between balance of trade and net capital outflow. • What the determinants of international capital flows are. • How to define the international market for loanable funds. • What determinants and types of exchange rates exists. • How exchange rates affect trade. • How monetary policy affects currency value. © 2014 by McGraw-Hill Education 2 International flows of goods and capital • International trade can be analyzed by studying the flow of goods and capital in and out of a country. • The balance of trade measures the flow of the value of goods and is calculated as: Balance of Trade = Exports - Imports • A trade deficit is a negative balance of trade. • A trade surplus is a positive balance of trade. © 2014 by McGraw-Hill Education 3 1 Active Learning: Imports and exports For each of the following situations, indicate whether there is a trade deficit or surplus and calculate the balance of trade. Imports (millions of $) Exports (millions of $) 15 10 37 47 54 27 Trade deficit or trade surplus? Balance of trade (millions of $) © 2014 by McGraw-Hill Education 4 International flows of goods and capital • Until 1975, . trade was relatively balanced. • After 1975, imports grew faster than exports, causing a trade deficit. Billions of dollars 2,500 Imports 2,000 Exports 1,500 Balance of trade (Exports _ imports) 1,000 500 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 -500 -1,000 -1,500 • Currently the trade deficit is approximately $600 billion. © 2014 by McGraw-Hill Education 5 International flows of goods and capital Much of . trade occurs with its closest neighbors. Even though it is far away, the biggest importer of goods into the . is China. Trade in billions of .
