Open-Economy Macroeconomics: Basic Concepts

Is an economy that does
not interact with other
economies in the world?

Is an economy that
interacts freely with other
economies around the
world?

They are key macroeconomic
variables that describe an open economy’s interactions in world markets:

An open economy interacts with other economies in two ways:

Are goods and services
produced domestically
and sold abroad:

Are goods and services
produced abroad and sold
domestically:

Is the value of a nation’s
exports minus the value
of its imports; also called
the trade balance?

Is the value of a nation’s
exports minus the value
of its imports; also called
net exports?

Is an excess of exports over
imports:

Is an excess of imports over
exports

Is a situation in which
exports equal imports

They are factors that might
influence a country’s exports, imports, and net exports

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

The net capital outflow sometimes is called?

When the net capital outflowit is positive?

When is the net capital outflow negative?

They are important variables that influence net capital outflow:

An open economy interacts with the rest of the world in two
ways. What are those two ways?

What mesures the net exports?

What mesures Net capital outflow?

net capital outflow (NCO) must always equal net exports (NX):

International Flows of Goods
and Capital: Summary
This table shows the three
possible outcomes for an open
economy

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

An increase in the
value of a currency as
measured by the amount
of foreign currency it can
buy

A decrease in the value of
a currency as measured
by the amount of foreign
currency it can buy

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

Is a key determinant of how much a country exports and imports

What to macroeconomists use to measure the real exchange
rate?

What does the real exchange rate measures?

Is a theory of exchange
rates whereby a unit of
any given currency should
be able to buy the same
quantity of goods in all
countries

refers to the value of money in terms of the quantity of goods it
can buy

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