Sie sind auf Seite 1von 35

CHAPTER 5

The Open Economy

A PowerPoint Tutorial
To Accompany

MACROECONOMICS, 7th. Edition


N. Gregory Mankiw
Tutorial written by:

Mannig J. Simidian

B.A. in Economics with Distinction, Duke University


Chapter
M.P.A., Harvard University Kennedy School of Government
Five
M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management

When an economy is so-called, open, it means that a countrys


spending in any given year is not equal to its output of goods and
services. A country can spend more that it produces by borrowing
from abroad, or it can spend less and lend the difference to foreigners.
Lets turn to national income accounting to explain.

Chapter
Five

Y = C + I + G + NX
Total demand
for domestic
output

is composed
of

Investment
spending by
businesses and
households

Net exports
or net foreign
demand

Consumption
Government
spending by purchases of goods
households
and services
Notice weve added net exports, NX, defined as EX - IM. Also, note that
domestic spending on all goods and services is the sum of domestic
spending
on domestics goods and services and on foreign goods and
Chapter
3
Five
services.

Y = C + I + G + NX
After some manipulation, the national income accounts identity can be
re-written as:

NX = Y - (C + I + G)
NetExports
Exports
Net

Output
Output

Domestic
Domestic
Spending
Spending

This equation shows that in an open economy, domestic spending need


not equal the output of goods and services. If output exceeds domestic
spending, we export the difference: net exports are positive. If output
falls short of domestic spending, we import the difference: net exports
are negative.
Chapter
4
Five

Start with the national income accounts identity. Y = C + I + G + NX.


Subtract C and G from both sides and obtain Y C - G = I + NX.
Lets call this S, national saving.
So, now we have S = I + NX. Subtract I from both sides to obtain the
new equation, S I = NX.
This form of the national income accounts identity shows that an
economys net exports must always equal the difference between its
saving and its investment.
S I = NX

Chapter
Five

Net Foreign Investment

Trade Balance
5

Net Capital Outflow = Trade


Balance

S I = NX
If S - I and NX are positive, we have a trade surplus. We would be net
lenders in world financial markets, and we are exporting more
goods than we are importing. Simply put, if Saving > Investment then
Net Capital Outflow > 0.
If S - I and NX are negative, we have a trade deficit. We would be net
borrowers in world financial markets, and we are importing more
goods than we are exporting. Simply put, if Saving < Investment then
Net Capital Outflow < 0.
If S - I and NX are exactly zero, we have balanced trade since the value
of imports equals the value of exports. Simply put, if Saving = Investment
then Net Capital Outflow = 0.
Chapter
Five

A bilateral trade balance between two countries means that the


value of what a country sells to one country is equal to the value of
what it buys from that country. For example, there would be a
bilateral trade balance between the United States. and China if the
United States buys a pair of shoes from China valued at $300, but also
sells a pair of jeans to China for $300.
A nation can have large trade deficits and surpluses with different
countries but have balanced trade overall. For example, there would
be balanced trade overall if the United States sells a $300 pair of jeans to
Japan, Japan sells a $300 car seat to China, and China sells a $300 pair of
shoes to the United States. In this case, each country that bought
something without having sold something to the country it bought the
good from has a bilateral trade deficit. But, each nation has balanced trade
overall, exporting and importing $300 worth of goods.
Chapter
7
Five

We are now going to develop a model of the


international flows of capital and goods.
Then, well address issues such as how the
trade balance responds to changes in policy.

Chapter
Five

Recall that the trade balance equals the net capital outflow, which
in turn equals saving minus investment. Our model focuses on saving
and investment. Well borrow a part of the model from Chapter 3, but
wont assume that the real interest rate equilibrates saving and
investment. Instead, well allow the economy to run a trade deficit
and borrow from other countries, or to run a trade surplus and lend
to other countries.
Consider a small open economy with perfect capital mobility in
which it takes the world interest rate r* as given, denoted r = r*.

Remember in a closed economy, what determines the interest rate is the


equilibrium of domestic saving and investmentand in a way, the world
is like a closed economytherefore, the equilibrium of world saving
and world investment determines the world interest rate.
Chapter
9
Five

The economys output Y is fixed by the


factors of production and the production
function.
Consumption is positively related to
C = C (Y-T)
disposable income (Y - T).
Investment is negatively related to the
I = I (r)
real interest rate.
The national income accounts identity,
NX = (Y-C-G) - I
expressed in terms of saving and investment.
or NX = S - I
Now substitute our three assumptions from Chapter 3 and the assumption
that the interest rate equals the world interest rate, r*.
Y = Y = F(K, L)

NX = (Y-C(Y-T) - G) - I (r*)
NX =
S - I (r*)
This equation suggests that the trade balance is determined by the
difference between saving and investment at the world interest rate.
Chapter
10
Five

Suppose the economy begins in a position of balanced trade. In


other words, at the world interest rate, investment I equals savings S,
and net exports equal zero. Lets use our model to predict the
effects of government policies at home or abroad.

Chapter
Five

11

Real
interest
rate, r*

In a closed economy, r adjusts to


equilibrate saving and investment.
In a small open economy, the
NX
interest rate is set by world
r*
financial markets. The difference
between saving and investment
determines the trade balance.
rclosed
In this case, since r* is
r*'
Above rclosed and saving
I(r)
NX
Investment, Saving, I, S exceeds investment,
there is a trade surplus
Hence, starting from balanced trade, an increase
in the world interest rate due to a fiscal expansion abroad leads to a trade
If the world interest rate decreased to r* ', I would exceed S and
surplus.
thereChapter
would be a trade deficit.
12
Five

An increase in government purchases or a cut in taxes decreases


national saving and thus shifts the national saving schedule to the left.
Real
interest
rate, r*

S'

NX = (Y - C(Y - T) - G) - I (r*)
NX = S

- I (r*)

The result is a reduction in national


saving which leads to a trade deficit,
where I > S.

r*
NX

I(r)
Investment, Saving, I, S

Chapter
Five

13

A fiscal expansion in a foreign economy large enough to influence


world saving and investment raises the world interest rate
from r1* to r2*.
Real
interest
rate, r*

S
The higher world interest rate reduces
investment in this small open
economy, causing a trade surplus
where S > I.

r2*
r1*

NX
I(r)
Investment, Saving, I, S

Chapter
Five

14

An outward shift in the investment schedule from I(r)1 to I(r)2 increases


the amount of investment at the world interest rate r*.
Real
interest
rate, r*

As a result, investment now


exceeds saving I > S, which
means the economy is
borrowing from abroad and
running a trade deficit.

r1*
NX

I(r)2

I(r)1

Investment, Saving, I, S
Chapter
Five

15

AAMankiw
Mankiw
Macroeconomics
Macroeconomics
Case
CaseStudy
Study

The U.S. Trade


Deficit

During the 1980s, 1990s, and 2000s, the U.S. ran large trade deficits, with the exact size
fluctuating over time yet still quite large. In 2007, the trade deficit was $708 billion or 5.1%
of GDP. As accounting identities require, this trade deficit had to be financed by borrowing
from abroad (i.e. selling U.S. assets abroad). During this period the U.S. went from being the
worlds largest creditor to the largest debtor.
What caused the U.S. trade deficit? There is no single explanation. But to understand some
of the forces at work, look at national saving and domestic investment (remember that the
trade deficit is the difference between saving and investment).
The start of the trade deficit coincided with a fall in national saving. This development can
be explained by the expansionary fiscal policy in the 1980s. With the support of President
Reagan, the U.S. Congress passed legislation in 1981 that substantially cut personal income
taxes over the next three years. Because these tax cuts were not met with equal cuts in
government spending, the federal budget went into deficit. These budget deficits were the
largest ever experienced in a period of peace and prosperity, and they continued long after
Reagan left office. According to our model, such a policy would reduce national saving,
causing a trade deficit. Because the government budget and the trade balance went into
deficit at the same time, these shortfalls were called the TWIN DEFICITS. Lets see what
happens as things start to change in the 90s on the next slide
Chapter
Five

16

AAMankiw
Mankiw
Macroeconomics
Macroeconomics
Case
CaseStudy
Study

More on the U.S. Trade


Deficit

Things started to change in the 1990s, when the U.S. federal government got its fiscal house in order.
The first President Bush and President Clinton both signed tax increases, while Congress put a lid on
spending. In addition to these policy changes, rapid productivity growth in the late 1990s raising
incomes and thus further increased tax revenue. These developments moved the U.S. federal budget to
surplus, which in turn caused national savings to rise.
In contrast to what our model predicts, the increase in national saving did not coincide with a
shrinking trade deficit, because domestic investment rose at the same time. The likely explanation
is that the boom in information technology caused an expansionary shift in the U.S. investment
function. Even though fiscal policy was pushing the trade deficit toward surplus, the investment boom
was an even stronger force pushing the trade balance toward deficit.
In the early 2000s, fiscal policy once again put downward pressure on national saving. With the
second President Bush, tax cuts were signed into law in 2001 and 2003, while the war on terror led
to substantial increases in government spending. The federal government was again running budget
deficits. National saving fell into historic lows, and the trade deficit reached historic highs.
A few years later, the trade deficit started to shrink, as the economy experienced a substantial decline
in housing prices (see Chapters 11 and 18). Lower house prices reduced housing investment. They
also made households poorer, inducing them to reduce consumption and increase saving. The trade
deficit fell from .1% of GDP as its peak in the fourth quarter of 2005 to 4.9% in the third quarter of
2007.
The history of the U.S. trade deficit shows that this statistic, by itself, does not tell us much about
what is happening in the economy. We have to look deeper at saving, investment, and the policies and
events that cause them (and thus the trade balance) to change over time.

Chapter
Five

17

In the next few slides, well learn about the foreign


exchange market, exchange rates and much more!

Chapter
Five

18

Lets think about when the United States and Japan engage in trade. Each
country has different cultures, languages, and currencies, all of which
could hinder trade. But, because of the foreign exchange market, trade
transactions become more efficient. The foreign exchange market is a
global market in which banks are connected through high-tech
telecommunications systems in order to purchase currencies for their
customers.
The next slide is a graphical representation of the flow of the trade
between the United States and Japan, and how the mix of traded things
might be different, but is always balanced. Also, notice how the foreign
exchange market will play the middle-man in these transactions. For
instance, the foreign exchange market converts the supply of dollars
from the United States into the demand for yen, and conversely, the
supply of yen into the demand for dollars.
Chapter
19
Five

In order for the U.S to pay for its imports of


goods and services and securities from Japan,
it must supply dollars which are then converted
into yen by the
foreign
S
E
C
&
I
V
R
Securities
E
S
&
exchange
S
D
O
O
G
market.
DemandYEN

SupplyYEN
Goods and
Services

Foreign
Foreign
Exchange
Exchange
Market
Market

Supply$

Demand$
&

ES
I
T
I
R
U
SEC

In order for Japan to pay for its imports of


goods and services and securities from the
it must supply yen which are then converted
U.S.,Chapter
into Five
dollars by the foreign exchange market.

20

The exchange rate between two countries is the price at which


residents of those countries trade with each other. Economists
distinguish between two exchange rates: the nominal exchange rate
and the real exchange rate.
The nominal exchange rate is the relative price of the currency of two
countries.
The real exchange rate is the relative price of the goods of two
countries.
Chapter
Five

21

-relative price of the currency of two countries


-denoted as e

-relative price of the goods of two countries


-sometimes called the terms of trade
-denoted as

Chapter
Five

22

The nominal exchange rate is the relative price of the currency of


two countries. For example, if the exchange rate between the U.S.
dollar and the Japanese yen is 120 yen per dollar, then you can
exchange a dollar for 120 yen in world markets for foreign currency.
A Japanese who wants to obtain dollars would pay 120 yen for each
dollar he bought. An American who wants to obtain yen would get
120 yen for each dollar he paid. When people refer to the exchange
rate between two countries, they usually mean the nominal exchange
rate.

Chapter
Five

23

Suppose that there is an increase in the demand for U.S. goods and
services. How will this affect the nominal exchange rate?
S$

e
e1
e0

D$
$
Dollar Value of Transactions
Chapter
Five

D$ shifts rightward and increases


the nominal exchange rate, e.
This is known as appreciation
of the dollar.
Events which decrease the
demand for the dollar, and thus
$
D decrease e, would be a
depreciation of the dollar.

24


The real exchange rate is the relative price of the goods of two
countries. That is, the real exchange rate tells us the rate at which we
can trade the goods of one country for the goods of another.
To see the difference between the real and nominal exchange rates,
consider a single good produced in many countries: cars. Suppose an
American car costs $10,000 and a similar Japanese car costs 2,400,000
yen. To compare the prices of the two cars, we must convert them into
a common currency. If a dollar is worth 120 yen, then the American
car costs 1,200,000 yen. Comparing the price of the American car
(1,200,000 yen) and the price of the Japanese car (2,400,000 yen), we
conclude that the American car costs one-half of what the Japanese
car costs. In other words, at current prices, we can exchange two
American cars for one Japanese car.
Chapter
25
Five

We can summarize our calculation as follows:


Real Exchange Rate = (120 yen/dollar) (10,000 dollars/American car)
(2,400,000 yen/Japanese Car)
= 0.5 Japanese Car
American Car
At these prices, and this exchange rate, we obtain one-half of a
Japanese
car per American car. More generally, we can write this calculation as
Real Exchange Rate =
Nominal Exchange Rate Price of Domestic Good
Price of Foreign Good
The rate at which we exchange foreign and domestic goods depends on
the prices of the goods in the local currencies and on the rate at which
Chapter
the currencies
are exchanged.
26
Five

Real Exchange
Rate

Nominal
Exchange
Rate

Ratio of Price
Levels

= e (P/P*)
Note: P is the price level of the domestic country (measured
in the domestic currency) and P* is the price level of the
foreign country (measured in the foreign currency).

Chapter
Five

27

Real Exchange
Rate

Nominal Exchange
Rate

Ratio of Price
Levels

= e (P/P*)

The real exchange rate between two countries is computed from the
nominal exchange rate and the price levels in the two countries. If the
real exchange rate is high, foreign goods are relatively cheap, and
domestic goods are relatively expensive. If the real exchange rate is
low, foreign goods are relatively expensive, and domestic goods
are relatively cheap.
Chapter
Five

28

How does the level of prices effect exchange rates? It doesnt. All
changes in a nations price level will be fully incorporated into the
nominal exchange rate. It is the law of one price applied to the
international marketplace.
Purchasing-Power Parity suggests that nominal exchange rate
movements primarily reflect differences in price levels of nations. It
states that if international arbitrage is possible, then a dollar must
have the same purchasing power in every country. Purchasing power
parity does not always hold because some goods are not easily
traded, and sometimes traded goods are not always perfect
substitutesbut it does give us reason to expect that fluctuations in
the real exchange rate will be small and temporary.
Chapter
Five

29

Real
exchange
rate,

S-I

The law of one price applied to the


international marketplace suggests that
net exports are highly sensitive to small
movements in the real exchange rate.
This high sensitivity is reflected here
with a very flat net-exports schedule.

NX()

Net Exports, NX
Chapter
Five

30

Real
exchange
rate,

The relationship between the real exchange rate


and net exports is negative: the lower the real
S-I exchange rate, the less expensive are domestic
goods relative to foreign goods, and thus the
greater are our net exports.
The real exchange rate is determined by the
intersection of the vertical line representing
saving minus investment and downward-sloping
net exports schedule.

0
Chapter
Five

Here the quantity of dollars


NX() supplied for net foreign
investment equals the
Net Exports, NX
quantity of dollars demanded
for the net exports of goods
31
and services.

Real
exchange
rate,
2

S2 - I S1- IExpansionary fiscal policy at home, such as an


increase in government purchases G or a cut in
taxes, reduces national saving.
The fall in saving reduces the supply of dollars
to be exchanged into foreign currency, from
S1-I to S2-I. This shift raises the equilibrium real
exchange rate from 1 to 2.
NX()

NX2

Chapter
Five

A reduction in saving reduces


NX1 Net Exports, NX the supply of dollars, which
causes the real exchange rate
to rise and causes net exports
to fall.
32

Real
exchange
rate,

S - I(r1*)S - I (r2*) Expansionary fiscal policy abroad reduces


world saving and raises the world interest
rate from r1* to r2*.
The increase in the world interest rate reduces
investment at home, which in turn raises the
supply of dollars to be exchanged into foreign
currencies.

1
2

NX()
NX1

Chapter
Five

NX2 Net Exports, NX

As a result, the equilibrium


real exchange rate falls
from e1 to e2.

33

Real
exchange
rate,

S - I2

2
1
NX2

Chapter
Five

An increase in investment demand raises


the quantity of domestic investment from I1
to I2.
As a result, the supply of dollars to be
exchanged into foreign currencies falls
from S - I1 to S - I2.
This fall in supply raises the
equilibrium real exchange
NX() rate from 1 to 2.

S - I1

NX1 Net Exports, NX

34

Net exports
Net capital outflow
Trade balance
Trade surplus and trade deficit
Balanced trade
Small open economy
World interest rate
Nominal exchange rate
Real exchange rate
Purchasing-power parity

Chapter
Five

35

Das könnte Ihnen auch gefallen