Chapter 31

Chapter 31 focuses on the basic concepts in an open economy. Throughout the book we have just been focused on a closed economy to make situations easier. This chapter talks about how the country interacts with other economies around the world, introducing the vocabulary words export, import, and net export. The net export is determined by subtracting the value of the export by the value of the import. There is a trade surplus if that number is positive and if its negative then theirs a trade deficit. International trade has become so important in the us economy. The chapter shows a graph that shows that the US has imported more than it has exported, so that means it has a trade deficit. Then the chapter talks about net capital outflow and how it is the purchase of foreign assets by domestic residents subtracted by the purchase of domestic assets by foreigners. It then focuses on how the net capital outflow is equal to the net exports. Then it talks about how savings can be used either at home or to by assets abroad. So this means that savings equals domestic investment and net capital outflow. The rest of the chapter talks about the nominal exchange rate, which is the price between two currency's. If the dollar buys more foreign money when the rate changes then the dollar has appreciated. If the change is the opposite then the dollar has depreciated.The chapter also talks about the theory of purchasing power parity which states that different units of currency should be able to by the same quantity of goods.