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Open Economy Macroeconomics Notes Essay

1109 words - 5 pages

Ch28 “Open-Economy Macroeconomics”

FOREIGN TRADE AND ECONOMIC ACTIVITY
Imports goods and services produced abroad and consumed domestically
Exports goods and services produced domestically and purchased by foreigners
Net exports defined as exports of goods and services minus imports of goods and services
Net foreign investment counterpart of net exports
* Denotes net US savings abroad and is approximately equal to the value of net exports
Domestic expenditures equal to consumption plus domestic investment plus government purchases

* The volume and value of imports will be affected by domestic output and the relative prices of domestic and foreign goods
Marginal ...view middle of the document...

In this case, domestic investment crowds out foreign investment
* an increase in world interest rates will reduce the level of investment. This will lead to an increase in the difference between saving and investment, to a depreciation in the foreign exchange rate, and to an increase in net exports and foreign investment (this would be a shift along the investment schedule)
* integration of a country into the world economy adds an important new dimension to macroeconomic performance and policy
* the foreign sector provides an important source of domestic investment and a potential outlet for domestic saving
* higher saving at home--- whether in the form of higher private saving or higher public saving will lead to higher net exports
* a country’s trade balance is primarily a reflection of its national saving and investment balance rather than of its absolute productivity or wealth
* adjustments in a country’s trade accounts require a change in domestic saving or investment
* in the long run, adjustments in trade accounts will be brought about by movements in the country’s relative prices, often through exchange-rate changes
Stable macroeconomic climate taxes are reasonable and predictable and that inflation is low, so lenders need not worry about inflation confiscating their investments
* promoting economic growth in an open economy involves ensuring that business is attractive for foreign and domestic investors who have a wide array of investment opportunities in the world economy. The ultimate goals of policy are to have high rates of saving and investment in productive channels and to ensure that businesses use best-practice techniques. Achieving these goals involves setting a stable macroeconomic climate, guaranteeing dependable property rights for both tangible investments and intellectual property, providing exchange-rate convertibility that allows investors to take home their profits, and maintaining confidence in the political and economic stability of the country

Competitiveness refers to the extent to which a nation’s goods can compete in the marketplace; this depends...

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