Economics 10b Chapter Notes - Chapter 31: Autarky, Comparative Advantage, Foreign Portfolio Investment

92 views6 pages

emeraldraccoon202

10 Jan 2019

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Closed economy: an economy that does not interact with other economies in the world. Open economy: an economy that interacts freely with other economies around the world. The international flows of goods and capital. An open economy interacts with other economies in two ways it buys and sells goods and services in world product markets it buys and sells capital assets such as stocks and bonds in world financial markets. The flow of goods: exports, imports, and net exports. Exports: goods and services that are produced domestically and sold abroad imports: goods and services that are produced abroad and sold domestically. Net exports: the value of a nation"s exports minus the value of its imports; also called trade balance. Net exports= value of country"s exports- value of country"s imports trade surplus: an excess of exports over imports trade deficit: an excess of imports over exports.

Related Questions

An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true:

Net Capital OutflowNet Capital Outflow

= =

Net ExportsNet Exports

In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold.

Suppose you are a software engineer living in the United States, and you just sold your latest product to a Russian consumer for RUB 7,000.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

Increase/no change/decrease

Imports

Increase/no change/decrease

Net Exports

Increase/no change/decrease

Because of the identity equation that relates to net exports, the in U.S. net exports is matched by in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply.

You store the rubles in your safety deposit box at home.

You purchase RUB 7,000 worth of stock in a Russian corporation.

You buy RUB 7,000 worth of Russian bonds.

purplehyena626

Since the United States has negative net foreignâ investment, its

A. net capital flow must be negative.

B. domestic saving must be less than its domestic investment.

C. exports must be greater than its imports.

D. domestic investment must be less than its domestic saving.

Expansionary fiscal policy is less effective in an open economy because

A. increases in the money supply will reduce interest rates and lower the value of theâ dollar, reducing aggregate demand.

B. increases in government spending can increase interestâ rates, which increases the value of the dollar and crowds out net exports.

C. increases in government spending will be partly spent on importedâ goods, which do not benefit the domestic economy.

D. increases in taxes reduceâ consumption, which in turn reduces consumption of imports and increases net exports.

When the Federal reserve uses contractionary monetary policy to reduceâ inflation, it

A. sells treasury securities increasing interestâ rates, leading to a stronger dollar that lowers net exports in an open economy.

B. buys treasury securities decreasing interestâ rates, leading to a weaker dollar that lowers consumption of durables in a closed economy.

C. sells treasury securities decreasing interestâ rates, leading to a stronger dollar that lowers domestic investment in a closed economy.

D. buys treasury securities increasing interestâ rates, leading to a weaker dollar that increases net exports in an open economy.

If a country saves more than it investsâ domestically, then its net foreign investment must be (positive, negative, or zero)?

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

ochreduck773

Economics 10b Chapter Notes - Chapter 31: Autarky, Comparative Advantage, Foreign Portfolio Investment

Document Summary

Get access

Related Documents

Economics 10b Chapter 32: Chapter 32 Notes

Economics 10b Lecture Notes - Lecture 2: Classical Dichotomy, Greg Mankiw, Money Supply

Economics 10b Chapter 23: Chapter 23 - Measuring a Nation's Income

Related Questions