ECON 205 2nd Edition Lecture 18 Outline of Last Lecture I Current Economic Issue The Fiscal Clif II Exchange rate system III Marginal Propensity to Import and the Open Economy IV Aggregate Supply and Labor Force V Unemployment VI Inflation and its efects Outline of Current Lecture I Open Economy Macroeconomics II Net foreign investment and imports III Government annual budget IV Fiscal policy and the fiscal clif V Deficit and Debt J B Say s Law Current Lecture I Open Economy Macroeconomics Open economy macroeconomics is the study of how economies behave when trade and financial linkages among nations are considered Ergo when calculating the gross domestic product X net exports has to be added The foreign trade involves imports which are goods produced abroad and consumed domestically and exports which are goods produced domestically and consumed abroad Net exports are exports minus imports II Net foreign investment and imports Net foreign investment denotes the net U S savings abroad and is approximately equal to net exports Imports are positively related to U S income and output When GDP rises imports into the US increase The demand for imports depends on the relative price of foreign and domestic goods Hence the volume and value of imports will be afected by domestic output and relative prices of domestic and foreign goods III Government annual budget Government annual budget The fiscal year is from September to the following September A budget surplus for the year means that tax revenues are greater than expenditure while deficit means expenditures are greater than tax revenues IV Fiscal policy and the fiscal clif Fiscal policy is the function of the current administration Congress puts together a budget for the following year and then goes through the budget to negotiate with Congress The main function of fiscal policy is taxes and expenditures Currently the president wants to raise taxes on the wealthy mainly on income The fiscal clif is the ongoing problem with the US debt Even though most plans call for tax decrease and expenditure increase macroeconomic theory supports the opposite V Deficit and Debt Deficit refers to one fiscal year which in the United States goes from September to September Debt refers to the total account that is permanent Additionally economists measure debt according to the debt ratio the debt of the country over the total GDP An internal debt is when the American government borrows from its citizens while external is from abroad Government debt displaces private investment Actual budget records revenues public expenditures deficit or surplus in a given period Structural budget however records what the revenues expenditures deficit or surplus would be if the economy was operating at its potential output Lastly cyclical budget is the diference between actual and structural budget VI J B Say s Law J B Say s Law 1803 Supply creates its own demand and overproduction is impossible Products are paid for by products and that any glut will be resolved through more market activity Income is a dynamic concept that deals with the amount of money per unit of time i e month Wealth is the total amount of money a unit has and is static