Journaling of Chapter 31: Open-Economy Macroeconomics: Basic Concepts

Chapter 31, titled ‘Open-Economy Macroeconomics: Basic Concepts’ develops the basic concepts and vocabulary associated with macroeconomics in an international setting: net exports, net capital outflow, real and nominal exchange rates, and purchasing-power parity. Readers learn why a nation’s net exports must equal its net capital outflow. The chapter also addresses the concepts of the real and nominal exchange rate and develops a theory of exchange rate determination known as purchasing-power parity. It discusses the study of macroeconomics in an open economy: an economy that interacts with other economies. An open economy interacts with other economies in two ways: It buys and sells goods and services in world product markets, and it buys and sells capital assets in world financial markets.

Exports are domestically produced goods and services sold abroad while imports are foreign-produced goods and services sold domestically. Net exports are the value of a country’s exports minus the value of its imports. Net exports are also called the trade balance. Net capital outflow (also called net foreign investment) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. Net capital outflow (NCO) equals net exports (NX): NCO = NX. Another formula is S = I + NCO. Saving = Investment = Net capital outflow. The nominal exchange rate is the rate at which people can trade one currency for another currency. An exchange rate between dollars and any foreign currency can be expressed in two ways: foreign currency per dollar or dollars per unit of foreign currency. The simplest explanation of why an exchange rate takes on a particular value is called purchasing-power parity. This theory says that a unit of any given currency should buy the same quantity of goods in all countries. Also, e = P*/P which means if purchasing-power parity holds, the nominal exchange rate is the ratio of the foreign price level to the domestic price level.

Overall, I give this chapter a difficulty rating of 2 out of 3.