The
The Goods
Goods Market
Market
in
in an
an Open
Open Economy
Economy
CHAPTER 19
Prepared by:
Fernando Quijano and Yvonn Quijano
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
Chapter 19: The Goods Market in an Open Economy
“中国崛起”成为2012
年美国总统选举第三轮
辩论的重要辩题。在辩
论中，20次提及“中
国”。
罗姆尼：把中国列为
“汇率操纵国”
奥巴马: 按规矩办事
问题：
汇率及其变动对国际贸易的影响；作用机制？
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
2017/7/29
• 汇率是两种不同货币的交换
Chapter 19: The Goods Market in an Open Economy
的比例
• 汇率主要有两种标价方法：
– 直接标价法（世界上绝大
数国家采用）
– 间接标价法（美国、英国
）
思考题：
在不同的汇率标价法中，如何表示本币和外
币
的升值或贬值？
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
2017/7/29
Chapter 19: The Goods Market in an Open Economy
19-1 The IS Relation in an Open Economy
Now we must be able to distinguish
between the domestic demand for goods
and the demand for domestic goods.
Some domestic demand falls on foreign
goods, and some of the demand for
domestic goods comes from foreigners.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
4 of 33
19-1 The IS Relation in an Open Economy
The Demand for Domestic Goods
In an open economy, the demand for domestic goods is given by:
Chapter 19: The Goods Market in an Open Economy
Z  C  I  G  IM /   X
实际汇率为用国外商品数表示国内商品价格，如一个美国（本国）汉堡相当于1.35个中国汉堡。实际
汇率的倒数为国内商品数表示国外商品价格。如一个中国(外国)汉堡相当于0.74个美国汉堡。
右边第三项为美国（国内）产品表示的进口商品数。
The first three terms—consumption, C, investment, I, and government
spending, G—constitute the domestic demand for goods.
Until now, we have only looked at C + I + G. But now
we have to make two adjustments:

First, we must subtract imports.

Second, we must add exports.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
5 of 33
19-1 The IS Relation in an Open Economy
The Determinants of C, I, and G
Chapter 19: The Goods Market in an Open Economy
Domestic Demand:
C  I  G  C (Y  T )  I (Y , r )  G
( + )
(+,-)
The real exchange rate affects the composition
of consumption and investment, but not the overall
level of these aggregates.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
6 of 33
19-1 The IS Relation in an Open Economy
The Determinants of Imports
Chapter 19: The Goods Market in an Open Economy
A higher real exchange rate leads to higher imports, thus:
IM  IM (Y ,  )
(  , )
 An increase in domestic income, Y, leads to
an increase in imports.
 An increase in the real exchange rate,
leads to an increase in imports, IM.
,
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
7 of 33
19-1 The IS Relation in an Open Economy
The Determinants of Exports
Chapter 19: The Goods Market in an Open Economy
Let Y* denote foreign income, thus for exports we write:
X  X (Y * ,  )
(  , )
 An increase in foreign income, Y*, leads to an
increase in exports.
 An increase in the real exchange rate,  , leads to a
decrease in exports.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
8 of 33
19-1 The IS Relation in an Open Economy
Putting the Components Together
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 1
The Demand for
Domestic Goods and
Net Exports
The domestic demand for
goods is an increasing
function of income (output).
(Panel a)
The demand for domestic
goods is obtained by
subtracting the value of
imports from domestic
demand, and then adding
exports. (Panel b)
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
9 of 33
19-1 The IS Relation in an Open Economy
Putting the Components Together
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 1
The Demand for
Domestic Goods and
Net Exports
The demand for
domestic goods is
obtained by subtracting
the value of imports
from domestic demand,
and then adding exports.
(Panel c)
The trade balance is a
decreasing function of
output. (Panel d)
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
10 of 33
19-1 The IS Relation in an Open Economy
Putting the Components Together
Chapter 19: The Goods Market in an Open Economy
We can establish two facts about line AA, which will be useful later
in the chapter:
 AA is flatter than DD. As income increases, the domestic
demand for domestic goods increases less than total domestic
demand.
 As long as some of the additional demand falls on domestic
goods, AA has a positive slope.
YTB is the value of output that corresponds to a trade balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
11 of 33
19-2 Equilibrium Output and the
Trade Balance
Chapter 19: The Goods Market in an Open Economy
The goods market is in equilibrium when domestic output
equals the demand – both domestic and foreign – for domestic
goods:
Y Z
Collecting the relations we derived for the components of the
demand for domestic goods, Z, we get:
Y  C Y  T   I Y , r   G  IM Y ,   /   X Y *,  
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
12 of 33
19-2 Equilibrium Output and the
Trade Balance
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 2
Equilibrium Output and
Net Exports
The goods market is in
equilibrium when domestic
output is equal to the demand
for domestic goods. At the
equilibrium level of output, the
trade balance may show a
deficit or a surplus.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
13 of 33
19-3 Increases in Demand, Domestic
or Foreign
Increases in Domestic Demand
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 3
The Effects of an
Increase in Government
Spending
An increase in government
spending leads to an increase
in output and to a trade deficit.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
14 of 33
19-3 Increases in Demand, Domestic
or Foreign
Increases in Domestic Demand
Chapter 19: The Goods Market in an Open Economy
There are two important difference you should note between
open and closed economies:
 There is now an effect on the trade balance. The increase in
output from Y to Y’ leads to a trade deficit equal to BC.
Imports go up, and exports do not change.
 Government spending on output is smaller than it would be
in a closed economy. This means the multiplier is smaller
in the open economy.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
15 of 33
19-3 Increases in Demand, Domestic
or Foreign
Increases in Foreign Demand
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 4
The Effects of an
Increase in Foreign
Demand
An increase in foreign demand
leads to an increase in output
and to a trade surplus.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
16 of 33
19-3 Increases in Demand, Domestic
or Foreign
Increases in Foreign Demand
Chapter 19: The Goods Market in an Open Economy
The direct effect of the increase in foreign output is an increase
in U.S. exports by some amount, which we shall denote by  X :
 For a given level of output, this increase in exports leads to
an increase in the demand for U.S. goods by
 X , so the line shifts by  X from ZZ to ZZ’.
 For a given level of output, net exports go up by  X . So the
line showing net exports as a function of output in Panel (b)
also shifts up by  X , from NX to NX’.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
17 of 33
19-3 Increases in Demand, Domestic
or Foreign
Fiscal Policy Revisited
Chapter 19: The Goods Market in an Open Economy
We have derived two basic results so far:
 An increase in domestic demand leads to an
increase in domestic output, but leads also to a
deterioration of the trade balance.
 An increase in foreign demand leads to an
increase in domestic output and an improvement
in the trade balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
18 of 33
19-3 Increases in Demand, Domestic
or Foreign
Chapter 19: The Goods Market in an Open Economy
Fiscal Policy Revisited
The so-called G7 – the seven major countries of the world –
meet regularly to discuss their economic situation; the
communiqué at the end of the meeting rarely fails to mention
coordination. The fact is that there is very limited macrocoordination among countries. Here’s why:
 Some countries might have to do more than others and may
not want to do so.
 Countries have a strong incentive to promise to coordinate,
and then not deliver on that promise.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
19 of 33
19-4 Depreciation, the Trade Balance,
and Output
Chapter 19: The Goods Market in an Open Economy
Recall that the real exchange rate is given by :
EP

P
*
In words:
The real exchange rate,  , is equal to the nominal
exchange rate, E, times the domestic price level, P,
divided by the foreign price level, P*.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
20 of 33
19-4 Depreciation, the Trade Balance,
and Output
Depreciation and the Trade Balance:
The Marshall–Lerner Condition
NX  X (Y ,  )  IM (Y ,  ) / 
Chapter 19: The Goods Market in an Open Economy

As the real exchange rate  enters the right side of the equation
in three places, this makes it clear that the real depreciation
affects the trade balance through three separate channels:
 Exports, X, increase.
 Imports, IM, decrease
 The relative price of foreign goods in terms of domestic
goods, 1/e, increases.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
21 of 33
19-4 Depreciation, the Trade Balance,
and Output
Chapter 19: The Goods Market in an Open Economy
Depreciation and the Trade Balance:
The Marshall–Lerner Condition
The Marshall-Lerner condition is the condition
under which a real depreciation (a decrease in )
leads to an increase in net exports.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
22 of 33
19-4 Depreciation, the Trade Balance,
and Output
Chapter 19: The Goods Market in an Open Economy
The Effects of a Depreciation
Let’s summarize: The depreciation leads to a shift in
demand, both foreign and domestic, toward domestic
goods. This shift in demand leads in turn to both an
increase in domestic output and an improvement in the
trade balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
23 of 33
19-4 Depreciation, the Trade Balance,
and Output
Combining Exchange Rate and Fiscal Policies
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 5
Reducing the Trade
Deficit without Changing
output
To reduce the trade deficit
without changing output, the
government must both
achieve a depreciation and
decrease government
spending.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
24 of 33
19-4 Depreciation, the Trade Balance,
and Output
Combining Exchange Rate and Fiscal Policies
Chapter 19: The Goods Market in an Open Economy
If the government wants to eliminate the trade deficit without
changing output, it must do two things:
 It must achieve a depreciation sufficient to eliminate the
trade deficit at the initial level of output.
 The government must reduce government spending.
Table 19-1
Initial Conditions
Exchange-Rate and Fiscal Policy Combinations
Trade Surplus
Trade Deficit
Low output
?G
 G?
High output
G?
?G
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
25 of 33
Chapter 19: The Goods Market in an Open Economy
19-5 Looking at Dynamics: The J-Curve
A depreciation may lead to an initial deterioration of
the trade balance;  decreases, but neither X nor IM
adjusts very much initially, leading to a decline in net
exports(X-IM/epsilon)
Eventually, exports and imports respond, and
depreciation leads to an improvement of the trade
balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
26 of 33
19-5 Looking at Dynamics: The J-Curve
Figure 19 – 6
Chapter 19: The Goods Market in an Open Economy
The J-Curve
A real depreciation leads
initially to a deterioration and
then to an improvement of the
trade balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
27 of 33
19-5 Looking at Dynamics: The J-Curve
Chapter 19: The Goods Market in an Open Economy
Figure 19 – 7
The Real Exchange Rate
and the Ratio of the
Trade Deficit to GDP:
United States, 1980 to
1990
The real appreciation and
depreciation of the dollar in
the 1980s were reflected in
increasing and then
decreasing trade deficits.
There were, however,
substantial lags in the effects
of the real exchange rate on
the trade balance.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
28 of 33
Chapter 19: The Goods Market in an Open Economy
19-5 Looking at Dynamics: The J-Curve
Figure 19-7 plots the U.S. trade deficit against the U.S. real
exchange rate in the 1980s. Turning to the trade deficit,
which is expressed as a ratio to GDP, two facts are clear:
1. Movements in the real exchange rate were reflected
in parallel movements in net exports.
2. There were substantial lags in the response of the
trade balance to changes in the real exchange rate.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
29 of 33
19-6 Saving, Investment, and the Trade Balance
Chapter 19: The Goods Market in an Open Economy
The alternative way of looking at equilibrium from the
condition that investment equals saving has an important
meaning:
Y  C  I  G  IM /   X
Subtract C + T from both sides and use the fact that
private saving is given by S = Y – C – T to get
S  I  G  T  IM /   X
Use the definition of net exports, NX  X  IM/, and
reorganize, to get:
NX  S  (T  G)  I
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
30 of 33
19-6 Saving, Investment, and the Trade Balance
NX  S  (T  G)  I
Chapter 19: The Goods Market in an Open Economy
From the equation above, we conclude:
 An increase in investment must be reflected in either
an increase in private saving or public saving, or in a
deterioration of the trade balance.
 An increase in the budget deficit must be reflected in an
increase in either private saving, or a decrease in investment,
or a deterioration of the trade balance.
 A country with a high saving rate must have either a high
investment rate or a large trade surplus.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
31 of 33
The U.S. Trade Deficit: Origins and Implications
Chapter 19: The Goods Market in an Open Economy
Table 1
Average Annual Growth Rates in the United States,
the European Union, and Japan since 1991
(percent per year)
1991 to 1995
1996 to 2000
2001 to 2003
United States
2.5
4.1
3.4
European Union
2.1
2.6
1.6
Japan
1.5
1.5
1.6
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
32 of 33
Chapter 19: The Goods Market in an Open Economy
The U.S. Trade Deficit: Origins and Implications
Figure 1 U.S. Net Saving and Net Investment since 1996 (percent of GDP)
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
33 of 33
The U.S. Trade Deficit: Origins and Implications
Chapter 19: The Goods Market in an Open Economy
What Happens Next?
There are three implications:
 The U.S. trade and current account deficits will
decline in the future.
 This decline is unlikely to happen without a real
depreciation.
 Most likely, this depreciation will take place
when foreign investors become reluctant to lend
to the United States at the rate of $800 billion or
so per year.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
34 of 33
Key Terms
 demand for domestic goods
Chapter 19: The Goods Market in an Open Economy
 domestic demand for goods
 coordination, G-7
 Marshall-Lerner condition
 J-curve
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard
35 of 33