Professional Documents
Culture Documents
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
30%
25%
20%
15%
10%
5%
0%
Canada France Germany Italy Japan Mexico U.K. USA
Imports Exports
source: OECD
= ( C − C f ) + ( I − I f ) + ( G − G f ) + EX
= C + I + G + EX − ( C f + I f
+Gf )
= C + I + G + EX − I M
= C + I + G + NX
Y = C + I + G + NX
or, NX = Y – (C + I + G )
domestic
spending
net exports
output
NX = EX – IM = Y – (C + I + G )
trade surplus:
output > spending and exports > imports
Size of the trade surplus = NX
trade deficit:
spending > output and imports > exports
Size of the trade deficit = –NX
1%
0%
-1%
-2%
-3%
-4%
-5%
1975 1980 1985 1990 1995 2000
NX = Y – (C + I + G )
implies
NX = (Y – C – G ) – I
= S – I
trade balance = net capital outflows
Thus,
Thus,
aa country
country with
with aa trade deficit ((NX
trade deficit NX << 00))
isis aa net borrower ((SS << II ).).
net borrower
consumption function: C = C (Y − T )
investment function: I = I (r )
exogenous policy variables: G = G , T = T
r S = Y − C (Y −T ) − G
As in Chapter 3,
national saving does
not depend on the
interest rate
S S, I
implyrr ==r*
aa&&bbimply r*
impliesr*
ccimplies r* isisexogenous
exogenous
I (r* ) S, I
I (r )
I (r c ) S, I
=S
CHAPTER 5 The Open Economy slide 17
But in a small open economy…
the exogenous r
S
world interest
rate determines
investment… NX
…and the r*
difference
between saving r c
and investment I (r )
determines net
capital outflows
I1 S, I
and net exports
NX 1
Results:
∆I = 0
∆NX = ∆S < 0 I (r )
I1 S, I
Percent of GDP
Percent of GDP
3 (right scale) 6
2 4
1 2
0 0
-1 -2
-2 -4
-3 -6
Net exports
-4 -8
(left scale)
-5 -10
1950 1960 1970 1980 1990 2000
Results:
∆I < 0 I (r )
∆NX = −∆I > 0
S, I
I (r )
2
*
I ( r 1* )
r *
EXERCISE:
Use the model to NX 1
determine the impact
of an increase in
investment demand I (r )1
on NX , S , I , and net
capital outflow. I1 S, I
∆ S = 0,
net capital NX 1
outflows and I (r )2
net exports
fall by the I (r )1
amount ∆ I
I1 I2 S, I
1973:1 = 100
2% 140
1% 120
0% 100
-1% 80
-2% 60
-3% 40
-4% 20
-5% 0
1975 1980 1985 1990 1995 2000
so U.S. net
When ε is exports will
relatively low, be high
U.S. goods are ε1
relatively
inexpensive NX (ε )
0 N
NX (ε 1 )
X
CHAPTER 5 The Open Economy slide 34
The NX curve for the U.S.
ε At high enough
values of ε ,
ε2 U.S. goods become
so expensive that
we export
less than
we import
NX(ε )
NX (ε 2 ) 0 N
X
CHAPTER 5 The Open Economy slide 35
How ε is determined
The accounting identity says NX = S − I
We saw earlier how S − I is determined:
• S depends on domestic factors (output,
fiscal policy variables, etc)
• I is determined by the world interest
rate r *
So, ε must adjust to ensure
NXε( ) =S −I r( * )
Neither S nor I S 1 − I (r * )
depend on ε , ε
so the net capital
outflow curve is
vertical.
ε1
ε adjusts to
equate NX NX (ε )
with net capital
outflow, S − I . NX
NX 1
supply: ε1
The net capital
outflow (S − I ) NX (ε )
is the supply of
dollars to be NX
NX 1
invested abroad.
An increase in r* S 1 − I (r 1 * )
reduces investment, ε S 1 − I (r 2 * )
increasing net
capital outflows and ε
1
the supply of dollars
in the foreign
exchange market… ε 2
NX (ε )
…causing the
real exchange NX
rate to fall and NX 1 NX 2
NX to rise.
CHAPTER 5 The Open Economy slide 41
3. An increase in investment demand
An increase in S1 − I 2
investment ε S1 − I 1
reduces net
capital outflows
ε2
and the supply
of dollars in the
foreign exchange ε1
market…
NX (ε )
…causing the
NX
real exchange NX 2 NX 1
rate to rise and
NX to fall.
CHAPTER 5 The Open Economy slide 42
4. Trade policy to restrict imports
Results:
ε S −I
∆ε > 0
(demand
increase) ε2
∆ NX = 0
(supply fixed) ε1
∆ IM < 0 NX (ε )2
(policy)
NX (ε )1
∆ EX < 0
(rise in ε ) NX
NX 1
P*
eε = ×
P
NX
CHAPTER 5 The Open Economy slide 51
Does PPP hold in the real world?
No, for two reasons:
1. International arbitrage not possible.
nontraded goods
transportation costs
2. Goods of different countries not perfect
substitutes.
Nonetheless, PPP is a useful theory:
• It’s simple & intuitive
• In the real world, nominal exchange rates
have a tendency toward their PPP values over
the long run.
CHAPTER 5 The Open Economy slide 52
CASE STUDY
The Reagan Deficits revisited
actual closed small open
1970s 1980s
change economy economy
G–T 2.2 3.9 ↑ ↑ ↑
S 19.6 17.4 ↓ ↓ ↓
r 1.1 6.3 ↑ ↑ no change
I 19.9 19.4 ↓ ↓ no change
NX -0.3 -2.0 ↓ no change ↓
ε 115.1 129.4 ↑ no change ↑
Data: decade averages; all except r and ε are expressed
as a percent of GDP; ε is a trade-weighted index.
CHAPTER 5 The Open Economy slide 53
The U.S. as a large open economy
So far, we’ve learned long-run models for
two extreme cases:
closed economy (chapter 3)
small open economy (chapter 5)
A large open economy --- like the U.S. --- is
in between these two extremes.
The analysis of policies or other exogenous
changes in a large open economy is a mixture of
the results for the closed & small open economy
cases.
For example…
CHAPTER 5 The Open Economy slide 54
A fiscal expansion in three models
A fiscal expansion causes national saving to fall.
The effects of this depend on the degree of openness:
closed large open small open
economy economy economy
rises, but not as much no
r rises
as in closed economy change
falls, but not as much no
I falls
as in closed economy change
no falls, but not as much as
NX falls
change in small open economy