Exports: Goods and services produced domestically and sold abroad.

Imports: Goods and services produced abroad and sold domestically.

Net exports: A country’s export value minus its import value, also known as the trade balance. Net exports (NX) = a country’s export value – a country’s import value

Trade surplus: The excess of exports over imports.

Trade deficit: The excess of imports over exports.

Balance of trade: A situation in which exports equal imports.

Factors that affect a country’s exports, imports and net exports include: 1. Consumers’ perceptions of domestic and foreign Hobbies for items; 2. Prices of domestic and foreign items; 3. People can use domestic currency The exchange rate for purchasing foreign currency; 4. The income of domestic and foreign consumers; 5. Transfer from one country to another The cost of transporting goods to a country; 6. Government policy on international trade. With these variables As the volume of international trade changes, so does the volume of international trade.

Net capital outflow (NCO): foreign assets purchased by domestic residents minus capital purchased by foreigners national assets. Capital flows come in two forms: foreign direct investment and foreign portfolio investment.

Net capital outflows can be either positive or negative.

Important factors affecting net capital outflow: 1. The real interest rate obtained by foreign assets; 2. Domestic The real interest rate earned by assets; 3. The economic and political risks that can be perceived by holding foreign assets insurance; 4. Government policies that affect foreign ownership of domestic assets.

An open economy trades with the rest of the world's economies in two ways: goods and services in the world market and world financial markets.

Net exports and net capital outflows measure the type of imbalance in these two markets, respectively. net export balance measures the imbalance between a country's exports and its imports; net capital outflows measure the foreign purchases by its residents The imbalance between the volume of assets and the volume of domestic assets purchased by foreigners.

For the economy as a whole, net capital outflows must always equal net exports. NCO=NX

The following conclusions are summarized for the entire economy: 1. When a country has a trade surplus (NX>0), it sells to Foreigners have more goods and services than foreigners buy. its net sales of goods and services from abroad The foreign currency obtained must be used to purchase foreign assets. Therefore, capital flows out of a country (NCO >0). 2. When a country has a trade deficit (NX < 0), the goods it purchases from foreigners are equal to services more than are sold to foreigners, how is it a net purchase of these goods and services on the world market? What about fundraising? It must sell assets abroad, so capital flows into the country (NCO < 0).

International flows of goods and services and international capital flows are two sides of the same coin.

A country's savings and investment are key to its long-term economic growth. Savings in a closed economy is equivalent to investment, but in an open economy, things are not that simple.

Since Y=C I G NX, national savings is what is left after paying for fixed-term consumption and government purchases The national income, that is, national savings S=Y-C-G, can be obtained: Y-C-G=I NX, that is, S=I NX. Because net exports NX = net capital outflow NCO, we can get, S = I NCO, that is, savings = domestic investment Net capital outflow.

In a closed economy, NCO=0, so S=I. In an open economy, savings serve two purposes: Path: domestic investment and net capital outflow.

The nominal exchange rate is the rate at which one can exchange one country's currency for another country's currency. One exchange rate can always Expressed in two ways.

Appreciation: The increase in the value of a country's currency, measured by the amount of foreign currency it can purchase.

Depreciation: The decrease in the value of a country's currency as measured by the amount of foreign currency it can purchase.

Exchange rate index: A unit that converts many exchange rates into a single measure of the value of an international currency.

The real exchange rate is the rate at which a person can exchange goods and services from one country for goods and services from another country.

Real exchange rate (E) = nominal exchange rate (e) × domestic price (P)/foreign price (P※)

The real exchange rate depends on the nominal exchange rate and the prices of goods in both countries measured in their respective currencies.

The real exchange rate is a key factor in how much a country exports and imports.

A country's real exchange rate is a key determinant of its net exports of goods and services.

Law of One Price: An item should be sold for the same price everywhere, otherwise there will be untapped Opportunities to make profits.

Arbitrage: The process of taking advantage of price differences for the same thing in different markets.

According to the purchasing power parity theory, a currency must have the same purchasing power in all countries.

The implication of purchasing power parity theory on exchange rates is that the nominal exchange rate between the currencies of two countries depends on the price levels of the two countries.

Suppose P is the price of a basket of goods in the United States (measured in dollars), P※ is the price of a basket of goods in Japan (measured in yen), and e is the nominal exchange rate (the number of yen that can be purchased with 1 dollar), then 1/ P=e/P※, after sorting, we can get: 1=eP/P※. The left side of the equation is a constant and the right side is the real exchange rate, so if the purchasing power of a dollar is always the same domestically and abroad, then the real exchange rate - the relative price of domestic goods and foreign goods - will not change.

By sorting out the above equation, we can solve for the nominal exchange rate: e=P※/P. That is, the nominal exchange rate is equal to the ratio of the foreign price level (measured in foreign currency units) to the domestic price level (measured in domestic currency units). According to the purchasing power parity theory, the nominal exchange rate between the currencies of two countries must reflect the price levels of the two countries.

When a central bank prints large amounts of money, the value of that money decreases, both in terms of the goods and services it can buy and in terms of the other currencies it can buy.

Purchasing power parity theory is not entirely correct, and changes in exchange rates do not always guarantee that the dollar will Nations have always had the same real value.

The purchasing power parity theory does not always hold true in practice for the following two reasons: 1. Many items are not Easily traded; 2. Even tradable items are not traded when they are produced in different countries. Complete replacement is not always possible. For these reasons, real exchange rates are in fact constantly fluctuating.

But the basic logic of the purchasing power parity theory is credible: when the real exchange rate deviates from the purchasing power parity theory At the desired level, people will have incentives to buy and sell goods between countries. substantial and lasting Changes in the nominal exchange rate reflect changes in domestic and foreign price levels.

Savings (S) = domestic investment (I) net capital outflow (NCO). Both sides of this equation represent both sides of the loanable funds market. The supply of loanable funds comes from national savings (S), and the demand for loanable funds comes from domestic investment ( I) and net capital outflow (NCO).

Loanable funds should be interpreted as domestically generated flows of resources that can be used for capital accumulation. Whether purchasing domestic capital assets (I) or foreign capital assets (NCO), such purchases increase the demand for loanable funds. Since net capital outflow can be either positive or negative, it can either increase or decrease the demand for loanable funds caused by domestic investment. When NCO>0, there is a net outflow of state-owned capital. At this time, the net purchase of overseas capital increases the demand for domestically generated loanable funds; when NCO<0, there is a net inflow of state-owned capital. At this time, capital from abroad Resources reduce the demand for domestically generated loanable funds.

The supply and demand of loanable funds depend on the real interest rate. In addition to affecting national savings and domestic investment, a country's real interest rate also affects the country's net capital outflow.

Interest rates adjust to balance the supply and demand for loanable funds. At the equilibrium interest rate, the amount people want to save is exactly balanced by the desired amount of domestic investment and net capital outflow.

Net capital outflow (NCO) = net exports (NX). This identity states that the imbalance between purchases and sales of foreign capital assets (NCO) is equal to the imbalance between exports and imports of goods and services (NX). Both sides of the equation represent the two parties in the foreign exchange market, with net capital outflows representing the amount of dollars supplied to purchase foreign assets, and net exports representing the amount of dollars required to purchase net exports of U.S. goods and services.

The real exchange rate is the price that balances supply and demand in the foreign exchange market. The real exchange rate is the relative price of domestic goods relative to foreign goods and is thus a key determinant of net exports. An increase in the real exchange rate reduces the quantity of dollars demanded in the foreign exchange market.

Exchange rate changes affect both the cost of purchasing foreign assets and the benefits of owning those assets, with the two effects offsetting each other.

At an equilibrium real exchange rate, the demand for dollars from foreigners caused by net exports of U.S. goods and services exactly balances the supply of dollars from Americans caused by net outflows of U.S. capital.

Two identities: S=I NCO, NCO=NX.

In the loanable funds market, supply comes from national saving (S), demand comes from domestic investment (I) and net capital outflow (NCO), and the real interest rate balances supply and demand. In the foreign exchange market, supply comes from net capital outflows (NCO), demand comes from net exports (NX), and the real exchange rate balances supply and demand.

Net capital outflow is the variable linking these two markets. The key determinant of net capital outflow is the real interest rate, and the net capital outflow curve links the loanable funds market and the foreign exchange market.

The supply and demand of loanable funds determine the real interest rate, the real interest rate determines the net capital outflow, and the net capital outflow provides the supply of U.S. dollars in the foreign exchange market. The supply and demand for dollars in the foreign exchange market determine the real exchange rate.

Two markets determine two relative prices: the real interest rate and the real exchange rate. The simultaneous adjustment of these two relative prices brings supply and demand in the two markets into balance.

A deficit occurs when government spending is greater than government revenue. Because the government budget deficit represents negative public saving, it reduces national saving (the sum of public and private saving). Therefore, the government budget deficit reduces the supply of loanable funds, causing interest rates to rise and crowding out investment.

In an open economy, government budget deficits raise real interest rates, crowd out domestic investment, cause the dollar to appreciate, and shift the trade balance toward the deficit.

Trade policy is a government policy that directly affects the amount of goods and services a country imports or exports. Usually its purpose is to support a specific domestic industry. Common trade policies are tariffs (i.e., taxes on imported goods) and import quotas (i.e., taxes on imported goods). Limitations on the quantity of items produced abroad and sold domestically).

Import quotas reduce both imports and exports, but net exports (exports minus imports) do not change. Therefore, trade policy does not affect the trade balance. That is, policies that directly affect exports or imports do not change net exports.

Since NX=NCO=S-I, net exports are equal to net capital outflows, and net capital outflows are equal to national savings minus domestic investment. Trade policies do not change the trade balance because they do not change national saving and domestic investment. Given a given level of national savings and domestic investment, adjustments in the real exchange rate keep the trade balance unchanged no matter what trade policy the government pursues.

While trade policies do not affect a country's overall trade balance, they do affect certain businesses, industries, and countries.

The microeconomic impact of trade policy is greater than the macroeconomic impact.

Capital flight: A large and sudden decrease in demand for a country's assets.

Capital flight from a country increases the country's real interest rate and reduces the value of the country's currency in foreign exchange markets. A depreciating currency makes exports cheaper and imports more expensive, which shifts the trade balance toward a surplus, while rising interest rates reduce domestic investment, which slows capital accumulation and economic growth.