OPEN ECONOMY

( Involving Export and Import )

 An open economy is one that interacts freely with other economies around the world. An
open economy interacts with other countries in two ways.
o It buys and sells goods and services in world product markets.
o It buys and sells capital assets in world financial markets.
 The national income identity in an open economy
Y = C + I + G + NX or NX = Y – (C + I + G)

Y = Total demand for domestic output

C = Consumption spending by households
I = Investment spending by businesses and households
G = Government purchases of goods and services
NX = Net Export ( EX – IM)
 A trade deficit is a situation in which net exports (NX) are negative. ( Imports > Exports )
 A trade surplus is a situation in which net exports (NX) are positive. ( Exports > Imports )
 Net Capital Outflows of “loanable funds” S – I
o When S > I, country is a net lender
o When S < I, country is a net borrower