CHAPTER 2
NATIONAL INCOME IDENTITY
CLOSED ECONOMY
✗ = Ct It G > S =
Y -
C - G S = I
Domestic investment
> are
only possible
with domestic
savings ( or the other
wayarovmd)
OPEN
ECONOMY
✗ = ( 1- It G t CA
Howtofinonce a
deficit ?
|
( surplus) abroad Surplus Country financiering
Borrowing
> is
(A ) 0 →
>
CA EX IN
=
Foreign indebtemenincrea.es CA
deficit of other countries
> =
Y - C- It G = -
' CA < 0 (deficit) 1
> S = It CA
BALANCE OF PAYEMENTS
Sp
}
> =
Y -
T -
C
s =
Sp +
Sg S = Y - T -
C + T G
Sg
-
>
= -1 -
G
=
Y -
C -
G
!
Sp t Sg
= CA + I >
Sp = CA + ± -
Sg → gov narings .
=
(At I -
(T -
G)
= CA + It (G -
)
T
Is
deficit
"
debt
Gov running
"
: G) T is
gov
. . a
Sp -
I = CA t (G -
T )
I
met
private narings
, CHAPTER }
FOREIGN EXCHANGE MARKET
>
Rug =
Reu + ( EeUSD/ EUR -
EUSD/EUR ) / EUSD / EUR
( in USD ) is
A Dollar/Euro
1 Theescpected return on € -
deposito
exchange rate less than the rate return dollar deposito
of
>
NOONEISWIUINGTOHOLD € DEDOSITS on
USD Return
Eµ€
^ INTEREST
wants to sell their €
depositsformore
Everyone
→ -
> PARITY CONDITION lucratieve $ deposito
-
HOLDSTRUE
NO ONEIS WILLING TO
Ê$€
Adjustment of the exchanges rate
1 •
Had DEDOSITS
-
Ek - EN>ECTEDUSD → Holden
of € deposito try to sell themfor # deposito
RETURN ON
BIT : return
ishigheron #deposito than that euro
on
deposit at É$€
E¥€
-
EURODEPOSITS
to sell
→ No hoeder
of# deposito is Willing
M$ 7.tt#;emtuYJA!fTeiImYIrreny! ratefalhtowordsE.se#E$--c
Exchange
↓ ↳ foreign
Home
> Reu =
Rust ( ÉEUR/ USD
_
E
EUR/ UGD
) / EEUR / USD
13 Euro/ Dollar
exchange rate
>
NO ONEISWILLINGTOHOLD $ DEDOSITS
EUR Return
Ë INTEREST
^
# > PARITY CONDITION
HOLDSTRUE
NO ONEIS WILLING TO
E.IE/$ - •
HOLD € DEDOSITS
ÉÉN - EXPECTED EUR0
RETURN ON
É€$
-
USD DEPOSITS
>
ME Rate return
of
( in € terms )
, CHANGES ON THE FOREIGN EXCHANGE MARKET
CHANGE IN INTEREST RATE Remember :
"
E 1 18 1 € 1,1s $
A) 0 Rus
=
→
$/€ =
,
É $/ =
1,16 → 1€ = 1,16$
€
€ Return $ Return $
E
'
→ El
#
on
N
on
depositie depositie
An inverse Rvs the to the
in moves curve
rights =
Appreciation of $ or
Depreciotion f- €
the current
, > At
exchange rate
Ê$= ) ,
the escpected rate
of return on
$ deposito in
higher than on € deposito
É$€
n ,
.
→
Inventors wiel sell € deposito + increosed demand
for USD deposito
'
"
$ appreciatie from
E¥€ E
"
2 E →
Expected Return in USD
om euro deposito
)
Ris Pius Rate
of Return
>
( in USD )
A ( 0 Rus
€ Return
Return
#A on $ on $
deposito
'
depositie
<
A decraene in Rvs shift the curve to the
left
2
At the current
exchange
rate (
tij ) the return on
E¥€ >
$ deposito
1 €
deposito is
higher than on
É$€
i " = ' Inventors wiel sell their $ deposito for € deposito
Expected Return in USD
→
Increosing demand
for € deposito
om euro deposito
" '
>
>
$ depreciatie from E > E
Ris Pius
Rate
of Return
'
( in USD )
NATIONAL INCOME IDENTITY
CLOSED ECONOMY
✗ = Ct It G > S =
Y -
C - G S = I
Domestic investment
> are
only possible
with domestic
savings ( or the other
wayarovmd)
OPEN
ECONOMY
✗ = ( 1- It G t CA
Howtofinonce a
deficit ?
|
( surplus) abroad Surplus Country financiering
Borrowing
> is
(A ) 0 →
>
CA EX IN
=
Foreign indebtemenincrea.es CA
deficit of other countries
> =
Y - C- It G = -
' CA < 0 (deficit) 1
> S = It CA
BALANCE OF PAYEMENTS
Sp
}
> =
Y -
T -
C
s =
Sp +
Sg S = Y - T -
C + T G
Sg
-
>
= -1 -
G
=
Y -
C -
G
!
Sp t Sg
= CA + I >
Sp = CA + ± -
Sg → gov narings .
=
(At I -
(T -
G)
= CA + It (G -
)
T
Is
deficit
"
debt
Gov running
"
: G) T is
gov
. . a
Sp -
I = CA t (G -
T )
I
met
private narings
, CHAPTER }
FOREIGN EXCHANGE MARKET
>
Rug =
Reu + ( EeUSD/ EUR -
EUSD/EUR ) / EUSD / EUR
( in USD ) is
A Dollar/Euro
1 Theescpected return on € -
deposito
exchange rate less than the rate return dollar deposito
of
>
NOONEISWIUINGTOHOLD € DEDOSITS on
USD Return
Eµ€
^ INTEREST
wants to sell their €
depositsformore
Everyone
→ -
> PARITY CONDITION lucratieve $ deposito
-
HOLDSTRUE
NO ONEIS WILLING TO
Ê$€
Adjustment of the exchanges rate
1 •
Had DEDOSITS
-
Ek - EN>ECTEDUSD → Holden
of € deposito try to sell themfor # deposito
RETURN ON
BIT : return
ishigheron #deposito than that euro
on
deposit at É$€
E¥€
-
EURODEPOSITS
to sell
→ No hoeder
of# deposito is Willing
M$ 7.tt#;emtuYJA!fTeiImYIrreny! ratefalhtowordsE.se#E$--c
Exchange
↓ ↳ foreign
Home
> Reu =
Rust ( ÉEUR/ USD
_
E
EUR/ UGD
) / EEUR / USD
13 Euro/ Dollar
exchange rate
>
NO ONEISWILLINGTOHOLD $ DEDOSITS
EUR Return
Ë INTEREST
^
# > PARITY CONDITION
HOLDSTRUE
NO ONEIS WILLING TO
E.IE/$ - •
HOLD € DEDOSITS
ÉÉN - EXPECTED EUR0
RETURN ON
É€$
-
USD DEPOSITS
>
ME Rate return
of
( in € terms )
, CHANGES ON THE FOREIGN EXCHANGE MARKET
CHANGE IN INTEREST RATE Remember :
"
E 1 18 1 € 1,1s $
A) 0 Rus
=
→
$/€ =
,
É $/ =
1,16 → 1€ = 1,16$
€
€ Return $ Return $
E
'
→ El
#
on
N
on
depositie depositie
An inverse Rvs the to the
in moves curve
rights =
Appreciation of $ or
Depreciotion f- €
the current
, > At
exchange rate
Ê$= ) ,
the escpected rate
of return on
$ deposito in
higher than on € deposito
É$€
n ,
.
→
Inventors wiel sell € deposito + increosed demand
for USD deposito
'
"
$ appreciatie from
E¥€ E
"
2 E →
Expected Return in USD
om euro deposito
)
Ris Pius Rate
of Return
>
( in USD )
A ( 0 Rus
€ Return
Return
#A on $ on $
deposito
'
depositie
<
A decraene in Rvs shift the curve to the
left
2
At the current
exchange
rate (
tij ) the return on
E¥€ >
$ deposito
1 €
deposito is
higher than on
É$€
i " = ' Inventors wiel sell their $ deposito for € deposito
Expected Return in USD
→
Increosing demand
for € deposito
om euro deposito
" '
>
>
$ depreciatie from E > E
Ris Pius
Rate
of Return
'
( in USD )
