Professional Documents
Culture Documents
Chapter 7
Chapter 7
CHAPTER 7
OPEN ECONOMY MACROECONOMICS:
BASIC CONCEPTS
CONTENTS
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Exports:
Domestically – produced g&s sold abroad
Imports:
Foreign- produced g&s sold domestically
Net exports (NX): value of exports – value of imports
NX are also called the trade balance
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Assume the exchange rate between the Japanese yen and U.S.
dollar is 80 yen to one dollar.
• One U.S. dollar trades for 80 yen.
• One yen trades for 1/80 (= 0.0125) of a dollar.
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“The real exchange rate = 0.75 Japanese Big Macs per U.S Big
Mac”
Correct interpretation:
To buy a Big Mac in the U.S, a Japanese citizen must sacrifice
an amount that could purchase 0.75 Big Macs in Japan.
ACTIVE LEARNING
Compute a real exchange rate
e = 10 pesos per $
Price of a tall Starbucks Latte
P = $3 in U.S, P* = 24 pesos in Mexico
A. What is the price of a US latte measured in pesos?
B. Calculate the real exchange rate, measured as Mexican lattes
per US latte.
ACTIVE LEARNING
Answers
e = 10 pesos per $
Price of a tall Starbucks Latte
P = $3 in U.S, P* = 24 pesos in Mexico
A. What is the price of a US latte in pesos?
e x P = (10 pesos per $) x (3$ per US latte)
= 30 pesos per US latte
B. Calculate the real exchange rate.
𝑒𝑥𝑃 30 𝑝𝑒𝑠𝑜𝑠 𝑝𝑒𝑟 𝑈. 𝑆 𝑙𝑎𝑡𝑡𝑒
=
𝑃∗ 24 𝑝𝑒𝑠𝑜𝑠 𝑝𝑒𝑟 𝑀𝑒𝑥𝑖𝑐𝑎𝑛 𝑙𝑎𝑡𝑡𝑒
= 1.25 Mexican lattes per US latte
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E1
E0
Q
Q0 Q1
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E1
E0
Q
Q1 Q0
EVND/USD
S
A
E0
Q
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CASE 1 EVND/USD
Surplus in USD S S1 > D 1
supply
E1
E2
E0 A
D1 D2 S2 S1
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CASE 2 EVND/USD
D 2 > S2
S
A
E0
E2
Surplus in USD
demand D
Q
S2 S3 D3 D2 45
So,
What determines the movement in the supply curve and
the demand curve?
46
47
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Q1 Q0 Q
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CASE 2: E
S1
If Dchina for this S2
goods less elastic A
E0
Buy still more
E1 B
from China
SUSD rises D
Q0 Q1 Q
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CASE 1: E
S1
If D VN for this
goods strongly A
elastic E0
Buy less from VN
E1 B
DUSD falls
E falls, VND D1
appreciates against D2
USD
Q1 Q0 Q
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CASE 2: E
S1
B
If D VN for this E1
goods less elastic A
E0
Buy more from VN D2
DUSD rises
E rises, VND D1
depreciates against
USD
Q0 Q1 Q
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iVN -> iworld -> capital inflow -> SUSD rises -> E falls
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The speculation
If USD is predicted to rise in the future -> DUSD rises
->E rises
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56
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E S
B
E1
A
E0
D1
D0
Q
Q0 Q1 Q2
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Case 1: E
S0
E1 : QD =Q1 > QS = Q2 S1
E1 : shortage of USD
E0 A
E1 : CB sells out
(Q1 - Q2) USD E1 B
D0
Q2 Q0 Q1 Q
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Case 2: E
S0
B
E1 : QS =Q1 > QD = Q2 E1
E1 : surplus in USD
E0 A D1
E1 : CB buys (Q1 - Q2) USD
D0
Q2 Q0 Q1 Q
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Summary
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Summary
Summary
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