A PRIMER ON OPEN ECONOMY MACROECONOMICS

Krishnakumar S

such as stocks. as well as trade transfer payment ‡ The capital account records the purchases and sales of assets.‡ Y= C+I+G+X-M ‡ Y=(Cp+Cm) + (Ip+Im)+(Gp+Gm)+X-(Cm+Im+Gm) ‡ The balance of payments is the record of the transactions of the residents of a coutnry with the rest of the residents of the rest of the world ‡ The current account records trade in goods and services . bonds and land .

‡ Any current account deficit is of necessity financed by an offsetting capital account inflow. ‡ Current account deficit +net capital inflow =0 ‡ Balance of payments surplus= Increase in official exchange surplus = current account surplus+ net private capital flow .

foreign central banks stand ready to buy and sell their currencies of a fixed price in terms of dollars ‡ Intervention is the buying or selling of foreign exchange by the central bank .‡ Fixed exchange rates ‡ In a fixed exchange rate system.

‡ Flexible exchange rates ‡ In a flexible exchange rate system. by contrast. the cnetral bank allow the exchange rate to adjust to equate supply and demand for foreign currency .

measured in the same currency. It measures the competitiveness of a country in international trade.The Exchange rate in the Long Run ‡ Two currencies are at purchasing power parity when a unit of domestic currency can buy the same basket of goods at home or abroad ‡ The real exchange rate is the ratio of foreign to domestic prices . ‡ R=ePf/P .

the currencies are at purchasing power parity ‡ If real exchange rate is more than 1. the foreign goods are less expensive than domestic goods . the foreign goods are more expensive than domestic goods ‡ If the real exchanger ate is less than I.‡ If real exchange rate is 1.

‡ Y=(C+I+G)+(X-M) ‡ Y=A+(X-M) ‡ A= Spending by domestic residents=C+I+G .

Mundell Fleming Model: Perfect Cap Mobility with Fixed Exch Rates i LM LM E i=if E BP=0 IS o Output y .

Mundell Fleming Model: Perfect Cap Mobility with Flexible Exch Rates i LM LM E i=if E BP=0 IS o Output y .

exchange rate depreciation . trade balance improve.Monetary expansion ‡ Fixed exchange rates: No output change. reserve losses equal to money increase ‡ Flexible exchange rate: Output expansion.

trade balance worsens ‡ Flexible exchange rates: No output change. exchange rate appreciation . reduced net exports.Fiscal expansion ‡ Fixed exchange rates: Output expansion .

‡ ‡ ‡ ‡ ‡ ‡ Beggar thy neighbour policies real exchange rate depreciation and exports China and real exchange rate depreciation Devaluation and export competiveness Marshall-Lerner conditions Sum of the import and export elasticity of demand greater than one .

‡ Aggregate demand and aggregate supply curve ‡ Analytics of the same to be explained ‡ A case study of oil price increase .

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