Part 11 THE MACROECONOMICS OF OPEN ECONOMIES Open

Part 11 THE MACROECONOMICS OF OPEN ECONOMIES

Open and Closed Economies • A closed economy 封閉的經濟體系： one that does not interact with other economies: no exports, no imports, no capital flows. • An open economy 開放的經濟體系： one that interacts with other economies around the world. 1. buys/ sells goods & services in world product markets: International flow of goods. 2. buys/ sells capital assets in world financial markets: International flow of financial resources. Copyright © 2004 South-Western

1. The International Flow of Goods • Exports (EX，出口)：goods & services produced domestically and sold abroad. • Imports (IM，進口)：goods and services produced abroad and sold domestically. • Net exports (NX，淨出口) or trade balance (TB，貿易淨額)： NX=EX-IM Copyright © 2004 South-Western

The Flow of Goods Net exports or Trade balance： (1) NX=0，EX=IM：balanced trade 貿易平衡 (2) NX > 0，EX > IM：trade surplus 貿易盈餘 (出超) (3) NX < 0，EX < IM：trade deficit 貿易赤字 （入超） Copyright © 2004 South-Western

Factors that Affect NX (1) Tastes of consumers for domestic & foreign goods. (2) The incomes of consumers at home and abroad. (3) The prices of goods at home (P) and abroad (PF). (4) The exchange rates (匯率，e) at which people can use domestic currency to buy foreign currencies. (5) The costs of transporting goods from country to country. (6) The policies of the government toward international trade. Copyright © 2004 South-Western

Taiwan data: NX=EX-IM Copyright © 2004 South-Western

2. The Flow of Financial Resources • Net capital outflow (NCO)，淨資本流出： purchase of foreign assets by domestic residents minus purchase of domestic assets by foreigners. • A Taiwanese buys stock in the US corporation Capital outflow （$流出） • a US citizen buys Taiwan stock. Capital inflow （$流入） Net capital outflow =capital outflow –capital inflow （$淨流出） Copyright © 2004 South-Western

Factors that Influence NCO (1) real interest rates (r. F) being paid on foreign assets. real interest rates ( r ) being paid on domestic assets. the differences ( r- r. F ) matters As r↑ relative to r. F less capital outflow and more capital inflow NCO↓ (2) The perceived economic and political risks of holding assets abroad. (3) The government policies that affect foreign ownership of domestic assets. Copyright © 2004 South-Western

Saving, Investment, and the International Flows • Expenditure approach of GDP: Y = C + I + G + NX • Income approach of GDP: S= Y-C-G → S =Y-C-G = I + NX (Ch 26 Identity) Copyright © 2004 South-Western

Saving, Investment, and the International Flows • Saving S = △wealth (wealth: deposits/bonds/stocks/houses) = △domestic assets + △foreign assets = domestic investment +net capital outflow = I + NCO • An economy’s saving can be used to either finance investment at home or to buy assets abroad. Copyright © 2004 South-Western

The Equality of NX and NCO • National saving (S): S = I + NX or S= I + NCO NX = NCO 補充： 國際收支帳＝經常帳＋資本帳（小）＋金融帳 經常帳 ：包含NX 金融帳 ：包含這裡的NCO Ch 31 and Ch 32: 簡化分析 Copyright © 2004 South-Western

Taiwan data: S-I=NX Copyright © 2004 South-Western

Taiwan data: NCO=NX Copyright © 2004 South-Western

The Prices for International Transactions: Real and Nominal Exchange Rates • International transactions are influenced by international prices. • The nominal exchange rate 名目匯率 ： the rate at which a person can trade the currency of one country for the currency of another. 貨幣的價格（以另一種貨幣表示 ） Copyright © 2004 South-Western

Nominal Exchange Rates • The nominal exchange rate （e） is expressed in two ways: (1) in units of foreign currency per one Taiwan dollar. (2) in units of Taiwan dollars per one unit of the foreign currency. • Assume the exchange rate between the NT$ and U. S. dollar is NT$30. 3 to one U. S. dollar. (1) NT$1 trades for 1/30. 3 (= 0. 033) of a U. S. dollar. (2) One U. S. dollar trades for NT$30. 3 採用 Copyright © 2004 South-Western

Nominal Exchange Rates • Appreciation 升值: an increase in the value of a currency as measured by the amount of foreign currency it can buy. • Depreciation 貶值: a decrease eg, (1)US$1=NT$33 NT$30 （美金貶值） NT$1=US$(1/33) US$(1/30)：台幣升值 (2) US$1=NT$33 NT$35：台幣貶值(美金升值) Copyright © 2004 South-Western

Taiwan data: 台幣對美金匯率 Copyright © 2004 South-Western

匯率換算 2008/4/23 US$1=日圓$103 US$1=NT$30. 3 日圓$103=US$1=NT$30. 3 日圓$1=NT$0. 29 (NT$1=日圓$3. 4 ) Copyright © 2004 South-Western

Real Exchange Rates The real exchange rate 實質匯率: the rate at which a person can trade the goods and services of one country for the goods and services of another. • The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy. Copyright © 2004 South-Western

Real Exchange Rates • The real exchange rate depends on the nominal exchange rate and the prices of goods in the two countries measured in local currencies. Copyright © 2004 South-Western

Real Exchange Rates • If a case of Taiwan beer is NT$30, a case of American beer is US$0. 5, and e =30, A case of Taiwan beer is twice as expensive as American beer. Or the real exchange rate is 2 cases of American beer per case of Taiwan beer. Copyright © 2004 South-Western

Real Exchange Rates • The real exchange rate is a key determinant of how much a country exports and imports. (real exchange rate = terms of trade 貿易條件) • A depreciation (fall) in Taiwan real exchange rate: 貶值 (P/e. PF) ↓ ，due to P ↓or PF↑ or e↑ Taiwan goods have become cheaper relative to foreign goods. IM ↓ and EX ↑ NX ↑ Copyright © 2004 South-Western

A First Theory of Exchange -Rate Determination: Purchasing -Power Parity • The simplest and most widely accepted theory explaining the variation of currency exchange rates. • Purchasing-Power Parity Theory （PPP theory）購買力平價說： a unit of any given currency should be able to buy the same quantity of goods in all countries (same purchasing power). LR equilibrium theory Copyright © 2004 South-Western

Logic of PPP NT$1 = able to buy the same quantity of goods in all countries. =(1/P) unit of goods in Taiwan =(1/e)/PF unit of goods in foreign country 1/P= 1/e. PF P/e. PF =1 Copyright © 2004 South-Western

Logic of PPP • PPP based on the law of one price. （競爭）整合市場的單一價格 • According to the law of one price, a good must sell for the same price in all locations. • If the law of one price were not true, unexploited profit opportunities would exist. arbitrage. 套利：the process of taking advantage of differences in prices in different markets. eventually prices that differed in two markets would necessarily converge. 收斂 Copyright © 2004 South-Western

Arbitrage 1 • If real exchange rate = P/e. PF <1 P < e. PF Arbitrage 1： P < e. PF _ EX↑, IM↓ demand for domestic goods↑& demand foreign goods↓ Possible that P↑ or PF ↓, so that P=e. PF, NX=0 Copyright © 2004 South-Western

Implications of PPP • According to PPP, P/e. PF =1 Exchange rates move to ensure that in the LR. （LR equilibrium exchange rate: e*） • P/e. PF =1 e* = P/PF e* must reflect the different price levels in two countries. eg, P=NT$100, PF =US$3. 3 e* = P/PF =NT$100/US$3. 3= NT$30/US$ (美金 3. 3元的東西需花台幣 100元，即台幣只值美金的1/30) Copyright © 2004 South-Western

Implications of PPP LR: P depends on Ms ；PF depends on MFs △e* 例如： M↑ P↑ 依據PPP ( e* = P/PF) … e*↑（貶值） When CB prints large quantities of money, the money loses value both in terms of goods it can buy and in terms of the amount of other currencies it can buy. the currency depreciates relative to other currencies. Copyright © 2004 South-Western

Implications of PPP • 補充PPP較鬆的條件： 1改為常數 • real exchange rate = P/e. PF = c Copyright © 2004 South-Western

Figure 31. 3 Money, Prices, and the Nominal Exchange Rate During the German Hyperinflation Indexes (Jan. 1921 5 100) 1, 000, 000 Money supply 10, 000, 000 Price level 100, 000 1 Exchange rate . 00001 . 000001 1922 1923 1924 1925 Copyright © 2004 South-Western

Limitations of PPP (1) Many goods are not easily traded or shipped from one country to another. Nontraded goods：非貿易財 (2) Tradable goods are not always perfect substitutes when they are produced in different countries. Copyright © 2004 South-Western

Summary Copyright © 2004 South-Western