CHAPTER

28:

OPEN ECONOMY
MICROECONOMICS
REPORTED BY JOHN PHILIP CHAN

Open-economy
is the studymacroeconomics
of how economies behave when the trade
and financial linkages among nations are considered.
Import

These are the expenditures

on foreign goods and
services by domestic
The value
of exports is
residents.
added in the computation of
the GDP.

Expor
These are the domestically
tproduced goods and
services purchase by the
foreigners.
The value of
imports is deducted in
the computation of the GDP.

t
r
o
p
x
E
=
s
t
r
o
p
x
E
Net
I m p o rt

Net Exports
Difference between
exports and imports.

Net Exports
Net Foreign
Investment

is the value of the

assets that country
owns abroad, minus the
value of the domestic
assets owned by
foreigners.

Are Net Exports part of the

GDP? NET EXPORTS
Investment

GDP = C + I + G + (X
M)
Consumptio
n

Taxe
s

Equilibrium
that output level at which the total
GDP isamount
of goods produced,GDP, is
just equal to the total amount of
goods purchased.

Export

Import

Marginal Propensity to Import

is the increase in the dollar value of
imports for each $1 increase in GDP.

Marginal Propensity to Sav

tells us what fraction of an additional dollar of
income is not spent but leaks into saving.

Leakage
Part of income that leaks out in the
circular flow and causes to slow down
the rate of movement of income.

MPS is a leakage in
Open Economy savingsFlexible Exchange
is a monetary system that allows the
It may be defined as the amount by
Multiplier
Rates
exchange rateto
be determined by supply
whichnational
incomeof a nation will be
raised by a unit increase in domestic
investment
onexports.
As exports increase
there is an increase in the

income of all persons associated with the exports

industries

and demand.
Every currency area must decide
what type
ofexchange ratearrangement to maintain.