Macroeconomics week 5 + 6
Module code: EC108
Lecturer: Natalie Chen
Topics
● Openness in goods and financial markets
● Consumption
Openness in goods and financial markets
Three dimensions to openness
Openness in goods markets:
- The ability of consumers and firms to choose between domestic and foreign goods
- Even countries committed to free trade have tariffs + quotas
- Larger countries have smaller export ratios as they are more self sufficient
- Smaller countries rely more on international trade → more open
- Japan has a smaller export ratio because it is further away → distance effects how
open an economy is
- When goods markets are open, domestic consumers must decide not only how much
to consume + save, but also whether to buy domestic or foreign goods
- Central to the second decision is the price of domestic goods relative to foreign goods
(real exchange rate)
Openness in financial markets:
- The ability of financial investors to choose between domestic and foreign assets
- Until recently, some rich countries had capital controls (restrictions on the foreign
assets domestic residents could hold)
Openness in factor markets:
- The ability of firms to choose where to locate production and of workers to choose
where to work
Can exports exceed GDP?
- Since a country cannot export more than it produces, is the export ratio less than one?
- No, exports may be larger than GDP because exports and imports may include exports
and imports of intermediate goods
Real and nominal exchange rate
Nominal exchange rate - the price of domestic currency in terms of foreign currency
Nominal appreciation - an increase in the price of domestic currency in terms of a foreign
currency (increase in exchange rate)
, Nominal depreciation - a decrease in the price of domestic currency in terms of a foreign
currency (decrease in exchange rate)
Real appreciation - an increase in the real exchange rate (an increase in the relative price of
domestic goods in terms of foreign goods)
Real depreciation - a decrease in the real exchange rate (a decrease in the relative price of
domestic goods in terms of foreign goods)
Fixed exchange rates - a system in which two or more countries maintain a constant
exchange rate between their currencies
Revaluations - increases in the exchange rate
Devaluations - decreases in the exchange rate
Equation:
- P is the price of domestic goods in domestic currency
- P* is the price of foreign goods in foreign currency
- E is the nominal exchange rate
Module code: EC108
Lecturer: Natalie Chen
Topics
● Openness in goods and financial markets
● Consumption
Openness in goods and financial markets
Three dimensions to openness
Openness in goods markets:
- The ability of consumers and firms to choose between domestic and foreign goods
- Even countries committed to free trade have tariffs + quotas
- Larger countries have smaller export ratios as they are more self sufficient
- Smaller countries rely more on international trade → more open
- Japan has a smaller export ratio because it is further away → distance effects how
open an economy is
- When goods markets are open, domestic consumers must decide not only how much
to consume + save, but also whether to buy domestic or foreign goods
- Central to the second decision is the price of domestic goods relative to foreign goods
(real exchange rate)
Openness in financial markets:
- The ability of financial investors to choose between domestic and foreign assets
- Until recently, some rich countries had capital controls (restrictions on the foreign
assets domestic residents could hold)
Openness in factor markets:
- The ability of firms to choose where to locate production and of workers to choose
where to work
Can exports exceed GDP?
- Since a country cannot export more than it produces, is the export ratio less than one?
- No, exports may be larger than GDP because exports and imports may include exports
and imports of intermediate goods
Real and nominal exchange rate
Nominal exchange rate - the price of domestic currency in terms of foreign currency
Nominal appreciation - an increase in the price of domestic currency in terms of a foreign
currency (increase in exchange rate)
, Nominal depreciation - a decrease in the price of domestic currency in terms of a foreign
currency (decrease in exchange rate)
Real appreciation - an increase in the real exchange rate (an increase in the relative price of
domestic goods in terms of foreign goods)
Real depreciation - a decrease in the real exchange rate (a decrease in the relative price of
domestic goods in terms of foreign goods)
Fixed exchange rates - a system in which two or more countries maintain a constant
exchange rate between their currencies
Revaluations - increases in the exchange rate
Devaluations - decreases in the exchange rate
Equation:
- P is the price of domestic goods in domestic currency
- P* is the price of foreign goods in foreign currency
- E is the nominal exchange rate
