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Text,*, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,text,*, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Master case-study #2,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level - colorat diferit,*, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Name text y content - blue,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Basic Concepts,Closed economy,Economy that does not interact with other economies in the world,Open economy,Economy that interacts freely with other economies around the world,1, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Goods,Exports,Goods & services,Produced domestically,Sold abroad,Imports,Goods and services,Produced abroad,Sold domestically,2, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Goods,Net exports,Value of a nations exports,Minus the value of its imports,Also called trade balance,Trade balance,Value of a nations exports,Minus the value of its imports,Also called net exports,3, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Goods,Trade surplus,Excess of exports over imports,Trade deficit,Excess of imports over exports,Balanced trade,Exports equal imports,4, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Goods,Factors that influence a countrys exports, imports, and net exports:,Tastes of consumers for domestic & foreign goods,Prices of goods at home and abroad,Exchange rates,People use domestic currency to buy foreign currencies,Incomes of consumers at home and abroad,5, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Goods,Factors that influence a countrys exports, imports, and net exports:,Cost of transporting goods from country to country,Government policies toward international trade,6, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,The increasing openness of the U.S. economy,Increasing importance of international trade and finance,1950s, imports and exports: 4-5% of GDP,Recent years:,Exports increased more than twice,Imports increased more than three times,7, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,The increasing openness of the U.S. economy,Increase in international trade,Improvements in transportation,Advances in telecommunications,Technological progress,Governments trade policies,NAFTA,GATT,8, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Figure 1,The Internationalization of the U.S. Economy,This figure shows exports and imports of the U.S. economy as a percentage of U.S. gross domestic product since 1950. The substantial increases over time show the increasing importance of international trade and finance.,9, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Capital,Net capital outflow,Purchase of foreign assets by domestic residents,Foreign direct investment,Foreign portfolio investment,Minus the purchase of domestic assets by foreigners,10, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flow of Capital,Variables that influence net capital outflow,Real interest rates paid on foreign assets,Real interest rates paid on domestic assets,Perceived economic and political risks of holding assets abroad,Government policies that affect foreign ownership of domestic assets,11, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Net Exports=Net Capital Outflow,Net exports (NX),Imbalance between a countrys exports and its imports,Net capital outflow (NCO),Imbalance between,Amount of foreign assets bought by domestic residents,And the amount of domestic assets bought by foreigners,Identity: NCO = NX,12, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Net Exports=Net Capital Outflow,When NX 0 (trade surplus),Selling more goods and services to foreigners,Than it is buying from them,From net sale of goods and services,Receives foreign currency,Buy foreign assets,Capital - flowing out of the country: NCO 0,13, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Net Exports=Net Capital Outflow,When NX 0 (trade deficit),Buying more goods and services from foreigners,Than it is selling to them,The net purchase of goods and services,Needs financed,Selling assets abroad,Capital - flowing into the country: NCO Imports,Net exports 0,Y Domestic spending (C+I+G),S I,NCO 0,16, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flows,Trade deficit: Exports Imports,Net exports 0,Y Domestic spending (C+I+G),S I,NCO 0,17, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,International Flows,Balanced trade : Exports = Imports,Net exports = 0,Y = Domestic spending (C+I+G),S = I,NCO = 0,18, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Table 1,International Flows of Goods and Capital: Summary,This table shows the three possible outcomes for an open economy.,19, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,Past two decades,Borrowed heavily in world financial markets,To finance large trade deficits,Before 1980,National saving & domestic investment were close,Small net capital outflow,20, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,After 1980,National saving - fell substantially below investment,Net capital outflow - a large negative number,Capital inflow,U.S. - going into debt,21, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,Changes in capital flows,Arise from changes in saving,Arise from changes in investment,1980 to 1987,Increase flow of capital (from 0.5 to 3.6% of GDP),Decline in national saving of 2.6 percentage points,Decline public saving,Increase in government budget deficit,22, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,1991 to 2000,Increase flow of capital (from 0.5 to 3.9% of GDP),Saving increased,Budget surplus,Investment increased from 13.4 to 17.7% of GDP,23, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,2000 to 2006,Increase in capital flow (to 5.7% o GDP),Investment boom abated,Budget deficits,National saving - fell to extraordinarily low levels,2007 to 2009, Trade deficit shrank,Substantial decline in housing prices,Deep recession,Dramatic fall in investment,24, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,Trade deficit induced by a fall in saving,The nation is putting away less of its income to provide for its future,No reason to deplore the resulting trade deficits,Better to have foreigners invest in the U.S. economy than no one at all,25, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Is the U.S. trade deficit a national problem?,Trade deficit induced by an investment boom,Economy is borrowing from abroad to finance the purchase of new capital goods,For good return on investment - the economy should be able to handle the debts that are being accumulated,For lower return on investment - debts will look less desirable,26, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Figure 2,National Saving, Domestic Investment, and Net Capital Outflow,Panel (a) shows national saving and domestic investment as a percentage of GDP. You can see from the figure that national saving has been lower since 1980 than it was before 1980. This fall in national saving has been reflected primarily in reduced net capital outflow rather than in reduced domestic investment.,27, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Figure 2,National Saving, Domestic Investment, and Net Capital Outflow,Panel (b) shows net capital outflow as a percentage of GDP. You can see from the figure that national saving has been lower since 1980 than it was before 1980. This fall in national saving has been reflected primarily in reduced net capital outflow rather than in reduced domestic investment.,28, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,Nominal exchange rate,Rate at which a person can trade currency of one country for currency of another,Appreciation (strengthen),Increase in the value of a currency,As measured by the amount of foreign currency it can buy,Buy more foreign currency,29, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,Depreciation (weaken),Decrease in the value of a currency,As measured by the amount of foreign currency it can buy,Buy less foreign currency,30, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,Real exchange rate,Rate at which a person can trade goods and services of one country,For goods and services of another,31, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,Real exchange rate = (e P) / P*,Using price indexes,e nominal exchange rate between the U.S. dollar and foreign currencies,P price index for U.S. basket,P* price index for foreign basket,32, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,Depreciation (fall) in the U.S. real exchange rate,U.S. goods - cheaper relative to foreign goods,Consumers at home and abroad - buy more U.S. goods and fewer goods from other countries,Higher exports,Lower imports,Higher net exports,33, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Real & Nominal Exchange Rates,An appreciation (rise) in the U.S. real exchange rate,U.S. goods - more expensive compared to foreign goods,Consumers at home and abroad - buy fewer U.S. goods and more goods from other countries,Lower exports,Higher imports,Lower net exports,34, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Purchasing-Power Parity,Purchasing-power parity, PPP,Theory of exchange rates,A unit of any given currency,Should be able to buy the same quantity of goods in all countries,Basic logic of purchasing-power parity,Based on law of one price,A good must sell for the same price in all locations,35, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Purchasing-Power Parity,Arbitrage,Take advantage of price differences for the same item in different markets,Parity,Equality,Purchasing-power,Value of money in terms of quantity of goods it can buy,36, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Implications of PPP,If purchasing power of the dollar,Is always the same at home and abroad,Then the real exchange rate cannot change,Theory of purchasing-power parity,Nominal exchange rate between the currencies of two countries,Must reflect the price levels in those countries,37, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Nominal exchange rate during a hyperinflation,Natural experiment hyperinflation,High inflation,Arises when a government prints money to pay for large amounts of government spending,German hyperin
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