Chapter 31

Chapter 31 is about open economies, which means there's free trade and interactions between multiple economies. Economies interact in an open economy by buying and selling goods in world product markets and by buying and selling capital assets like stocks and bonds. Balanced trade occurs if exports equals imports. Net exports are the value of a country's exports minus the value of a country's imports. Net capital outflow equals the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. Foreign direct investment differs from foreign portfolio investment because the former actively manages the investment while the latter has a more passive role. Net capital outflow equals net exports. National saving equals Y -C -G. Saving, investment, and international capital flows are all linked and entangled. Saving equals domestic investment plus net capital outflow. The nominal exchange rate is the rate where a person can trade the currency of one country for the currency of another. Appreciation of currency strengthens because it can buy more foreign currency. Currency weakens when it depreciates. The real exchange rate depends on the nominal exchange rate and on the price of goods in the two countries measured in local currencies. Purchasing -power parity is a theory that a unit of currency must have that same real value in all the other countries. If the purchasing power of the dollar is always the same at home and elsewhere, then the real exchange rate can't change. The nominal exchange rate between the currencies of two countries must reflect the price levels in those countries. The theory of purchasing- power parity isn't completely accurate because many goods are not easily traded and even tradable goods aren't always perfect substitutes when produced in different countries.