


Study with the several resources on Docsity
Earn points by helping other students or get them with a premium plan
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Community
Ask the community for help and clear up your study doubts
Discover the best universities in your country according to Docsity users
Free resources
Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors
lecture notes on chapter 31
Typology: Study notes
1 / 4
This page cannot be seen from the preview
Don't miss anything!
Principles of Economics, 8 th^ Edition N. Gregory Mankiw Page 1
1. Introduction a. This another important chapter because its conclusions differ from those that you often read in the newspapers. b. We are shifting from a closed to an open economy. c. Closed economy is an economy that does not interact with other economies in the world. P. 654. d. Open economy is an economy that interacts freely with other economies around the world. P. 654.
Principles of Economics, 8 th^ Edition N. Gregory Mankiw Page 2 chapter. iv. The more important variables that influence net capital outflows are: (1) the real interest rates being paid on foreign assets, (2) the real interest rates being paid on domestic assets, (3) the perceived economic and political risks of holding assets abroad, and (4) the government policies that affect foreign ownership of domestic assets. d. The Equality of Net Exports and Capital Outflows i. Remember, Y = C + I + G + NX ii. National Savings(S) = Private savings (Y - C - T) plus public saving (T - G) = Y - C - G iii. S - I = NX, but S - I is the funds available for investing abroad-net capital outflow (NCO), so iv. NCO = NX (1) This is just a relationship, but it has important implications. (2) If a country has savings greater than investment (NCO>0), it has to have a trade surplus (NX > 0). (3) Alternatively, if a country like the USA has savings that are less than investment (NCO<0), it has to have a trade deficit (NX < 0). (4) This relationship is not altered by microeconomic policies such as limiting imports or stimulating exports because of the effect of these policies on exchange rates--our next topic. e. Saving, Investment, and Their Relationship to the International Flows i. Y = C + I + G + NX ii. S = I + NX iii. Domestic saving (S) is used for domestic investment (I) or net capital outflows (NCO). (1) S = I + NCO iv. Summing Up (1) Table 1: International Flows of Goods and Capital: Summary, P. 662. v. Case Study: Is the U. S. Trade Deficits a National Problem? P. 662. (1) The US has experienced net inflows of capital in most years since 1970. (2) It was usually due to low savings or high investment in the US. (3) The result has been that the US is now a net debtor, which has become an emotional issue.
Principles of Economics, 8 th^ Edition N. Gregory Mankiw Page 4 the different price levels in those countries. ii. If the purchasing power of the dollar is always the same at home and abroad, then the real exchange rate cannot change. iii. 1 = e x P/P* so iv. e = P */P v. A key implication of this theory is that nominal exchange rates change when the price levels change. vi. When the central bank prints large quantities of money, that money loses value both in terms of the goods and services it can buy and in terms of the amount of other currencies it can buy. vii. Consider an example: (1) Initially, a good is $1 in New York, €2 in Paris and the dollar is worth 2 euros. (2) Then France has a 50% inflation rate and the price in Paris rises to €3. If the nominal exchange rate does not change, a French person can take two euros to the US and buy the good cheaper there.
(4) Each dollar is worth more and each euro is worth less. d. Case Study: The Nominal Exchange Rate During a Hyperinflation, P. 670. i. Figure 3: Money, Prices, and the Nominal Exchange Rate during the German Hyperinflation. P. 670. e. Limitations of purchasing power parity i. This is not a perfect theory because (1) there are non-tradable goods and (2) some tradable goods are not good substitutes. (3) Case Study: The Hamburger Standard, P. 671.