Macroeconomics

‭Chapter‬‭7:‬ ‭Open‬‭Economy:‬‭International‬‭Trade‬‭and‬ ‭Finance‬ ‭Overview‬

‭Understanding‬ ‭the‬ ‭interconnected‬ ‭global‬ ‭landscape‬ ‭of‬ ‭macroeconomics‬ ‭is‬ ‭crucial‬ ‭as‬ ‭countries‬ ‭become‬ ‭increasingly‬ ‭interdependent‬ ‭due‬ ‭to‬ ‭globalization‬ ‭and‬ ‭international‬‭trade.‬‭This‬‭chapter‬‭will‬‭explore‬ ‭the‬‭broader‬‭economic‬‭picture‬‭and‬‭the‬‭forces‬ ‭that‬‭shape‬‭the‬‭open‬‭economy,‬‭including‬‭the‬ ‭dynamics‬ ‭of‬ ‭international‬ ‭trade‬‭and‬‭fnance‬ ‭and‬ ‭the‬ ‭intricacies‬ ‭of‬ ‭balance‬ ‭of‬ ‭payments‬ ‭and exchange rate.‬ ‭Learning Objectives‬

‭By the end of this chapter, you should be able to:‬

‭●‬ ‭Distinguish closed from open economies.‬ ‭●‬ ‭Identify, calculate, and interpret balance of payments accounts.‬ ‭●‬ ‭Defne and analyze changes in the exchange rate.‬ ‭●‬ ‭Understand how foreign exchange markets operate.‬ ‭●‬ ‭Identify and analyze the effects of exchange rate policies.‬ ‭A. Closed Economy vs. Open Economy‬

‭A‬ ‭closed‬‭economy‬ ‭,‬‭in‬‭the‬‭context‬‭of‬‭macroeconomics,‬‭is‬‭an‬‭economic‬‭model‬‭that‬‭assumes‬‭a‬‭nation‬‭does‬ ‭not‬‭engage‬‭in‬‭international‬‭trade.‬ ‭In‬‭a‬‭closed‬‭economy,‬‭there‬‭are‬‭no‬‭imports‬‭or‬‭exports‬ ‭of‬‭goods‬‭and‬ ‭services‬ ‭with‬ ‭other‬ ‭countries.‬ ‭Instead,‬‭all‬‭economic‬‭activity,‬‭production,‬‭consumption,‬‭and‬‭investment‬ ‭take‬ ‭place‬ ‭within‬ ‭the‬ ‭boundaries‬ ‭of‬ ‭the‬ ‭nation.‬ ‭This‬ ‭means‬ ‭that‬ ‭the‬‭measurement‬‭of‬‭GDP‬‭in‬‭a‬‭closed‬ ‭economy‬‭does‬‭not‬‭include‬‭imports‬‭and‬‭exports:‬‭GDP‬‭=‬‭C‬‭+‬‭I‬‭+‬‭G.‬‭A‬‭closed‬‭economy‬‭is‬‭one‬‭represented‬ ‭by the simple circular flow of income in Chapter 2 Section B: The Simple Circular Flow Diagram.‬ ‭●‬ ‭Self-Suffciency:‬ ‭In‬‭a‬‭closed‬‭economy,‬‭the‬‭nation‬‭is‬‭considered‬‭to‬‭be‬‭self-suffcient.‬‭This‬‭means‬ ‭that‬‭it‬‭produces‬‭all‬‭the‬‭goods‬‭and‬‭services‬‭it‬‭needs‬‭domestically‬‭without‬‭relying‬‭on‬‭imports‬‭from‬ ‭other countries. Likewise, it does not export its products to international markets.‬ ‭●‬ ‭Effciency‬ ‭Considerations:‬ ‭While‬ ‭the‬ ‭closed‬ ‭economy‬ ‭model‬ ‭simplifes‬ ‭economic‬ ‭analysis,‬ ‭it‬ ‭also‬‭highlights‬‭certain‬‭ineffciencies.‬‭One‬‭of‬‭the‬‭main‬‭drawbacks‬‭is‬‭that‬‭a‬‭closed‬‭economy‬‭may‬ ‭lack‬ ‭access‬ ‭to‬ ‭essential‬ ‭raw‬ ‭materials‬ ‭or‬ ‭resources‬ ‭that‬ ‭are‬‭not‬‭available‬‭domestically.‬‭These‬ ‭resources‬‭often‬‭play‬‭a‬‭vital‬‭role‬‭as‬‭inputs‬‭in‬‭the‬‭production‬‭of‬‭fnal‬‭goods‬‭and‬‭services.‬‭Without‬

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