After completing this chapter, students will be able to: Learn how net exports measure the international flow of goods and services, learn how net foreign investment measures the international flow of capital, consider why net exports must always equal net foreign investment,. | Review of the previous lecture Nominal interest rate equals real interest rate + inflation rate. Fisher effect: nominal interest rate moves one-for-one w/ expected inflation. is the opp. cost of holding money Money demand depends on income in the Quantity Theory more generally, it also depends on the nominal interest rate; if so, then changes in expected inflation affect the current price level. Review of the previous lecture Costs of inflation Expected inflation shoeleather costs, menu costs, tax & relative price distortions, inconvenience of correcting figures for inflation Unexpected inflation all of the above plus arbitrary redistributions of wealth between debtors and creditors Review of the previous lecture Hyperinflation caused by rapid money supply growth when money printed to finance govt budget deficits stopping it requires fiscal reforms to eliminate govt’s need for printing money Lecture 12 Instructor: Abbas Open economy - I Lecture Outline Open economy | Review of the previous lecture Nominal interest rate equals real interest rate + inflation rate. Fisher effect: nominal interest rate moves one-for-one w/ expected inflation. is the opp. cost of holding money Money demand depends on income in the Quantity Theory more generally, it also depends on the nominal interest rate; if so, then changes in expected inflation affect the current price level. Review of the previous lecture Costs of inflation Expected inflation shoeleather costs, menu costs, tax & relative price distortions, inconvenience of correcting figures for inflation Unexpected inflation all of the above plus arbitrary redistributions of wealth between debtors and creditors Review of the previous lecture Hyperinflation caused by rapid money supply growth when money printed to finance govt budget deficits stopping it requires fiscal reforms to eliminate govt’s need for printing money Lecture 12 Instructor: Abbas Open economy - I Lecture Outline Open economy Saving and investment Three experiment Open economy spending need not equal output saving need not equal investment Preliminaries EX = exports = foreign spending on domestic goods IM = imports = C f + I f + G f = spending on foreign goods NX = net exports (. the “trade balance”) = EX – IM superscripts: d = spending on domestic goods f = spending on foreign goods Open economy GDP = expenditure on domestically produced g & s Open economy The national income identity in an open economy Y = C + I + G + NX or, NX = Y – (C + I + G ) net exports output domestic spending Open economy Trade surpluses and deficits trade surplus output > spending and exports > imports Size of the trade surplus = NX trade deficit spending > output and imports > exports Size of the trade deficit = –NX NX = EX – IM = Y – (C + I + G ) Open economy International capital flows Net capital outflows =S – I =net outflow of “loanable funds” =net purchases of foreign assets the country’s purchases of foreign .
