Ec 111 1st Edition Lecture 16Outline of Last LectureI. Quantity Theory in Five StepsII. HyperinflationIII. The Inflation TaxIV. The Fisher EffectV. The Cost of InflationCurrent LectureI. A Special Cost of Unexpected InflationII. The Cost of InflationIII. ConclusionIV. Chapter 18: IntroductionV. Closed vs Open EconomyVI. Variables That Influence Net ExportsVII. Flow of Goods and ServicesVIII. Trade Surplus and DeficitsIX. The Increasing Openness of the US EconomyX. The Flow of CapitalXI. Variables That Influence Net Capital OutputXII. The Equality of Net Exports and Net Capital OutputXIII. Saving, Investment, and International Flows of Goods and ServicesA SPECIAL COST OF UNEXPECTED INFLATION- Arbitrary Redistribution of Wealth: higher-than-expected inflation transfers purchasing power from creditors to debtors-debtors get to repay their debt with dollars that aren’t worth as much. Lower-than-expected inflation transfers purchasing power from debtors to creditors.- High inflation is more variable and less predictable than low inflation- So, these arbitrary redistributions are frequent when inflation is highTHE COST OF INFLATION- All the costs are quite high for economies experiencing hyper inflation- For economies with low inflation (<10% per year) these costs are probably much smaller, though their exact size is open to debateThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.CONCLUSION- Prices rise when the government prints too much money- We saw that money is neutral in the long-run affecting only nominal variables- We will see that money has important effects in the short run on real variables like output and employmentCHAPTER 18: INTRODUCTION- One of the 10 principles of Economics form chapter 1:o Trade can make everyone better off- This chapter introduces basic concepts of international economicso The trade balanceo International flows of assetso Exchange ratesCLOSED VS OPEN ECONOMIES- Closed Economy: does not interact with other economies in the worldo Some tribes in the Amazon and in Africa- Open Economy: interacts freely with other economies around the worldFLOW OF GOODS AND SERVICES- Exports: domestically produced goods and services sold abroad- Imports: foreign produced goods and services sold domestically- Net Exports (NX) or Trade Balance: value of exports minus importsVARIABLES THAT INFLUENCES NET EXPORTS- Consumers’ preferences for foreign and domestic goods- Prices of goods at home and abroad- The exchange rates at which foreign currency trades for domestic currency- Transportation costs- Government policiesTRADE SURPLUSES AND DEFICITS- Net Export measures the imbalance in a country’s trade in goods and serviceso Trade Deficit: an excess of imports over exports  NX>0 and Y>C+I+Go Trade Surplus: an excess of exports over imports NX<0 and Y<C+I+Go Balanced Trade: when exports equals imports NX=0 and Y=C+I+G- Refer to page 380, Table 1. KNOW THIS INFO!!!!THE INCREASING OPENNESS OF THE US ECONOMY- Increasing importance of international trade and financeo 1950’s, imports/exports 4-5% of GDPo Recent years: Exports-increased more than twice Imports-increased more than three times- Increase in international tradeo Improvements in transportationo Advances in telecommunicationso Technological progresso Government’s trade policies NAFTA GATTTHE FLOW OF CAPITAL- Net Capital Outflow (NCO): domestic residents’ purchases of foreign assets minus foreigners’ purchase of domestic assets- The NCO is also called net foreign investment- The flow of capital abroad takes two formso Foreign Direct Investment: domestic residents or forms set up a foreign investment, suchas, McDonald’s opening a fast food restaurant in Moscow, or Disney making a themeparkin Hong Kongo Foreign Portfolio Investment: domestic residents purchase foreign stocks or bonds, supplying “loanable funds” to a foreign firm, such as, and American buys stocks in Toyota- NCO measures the imbalance in a country’s trade in asseto Most missed questions on exams are about NCOo When the NCO>0 “Capital Outflow”-domestic purchases of foreign assets exceed foreignpurchases of domestic assetso When NCO<0 “Capital Inflow”-foreign purchases of domestic assets exceed domestic purchases of foreign assetsVARIABLES THAT INFLUENCE NET CAPITAL OUTFLOW- Real interest rates paid on foreign assets- Real interest rates paid on domestic assets- Perceived risks of holding foreign assets - Government policies affecting foreign ownership of domestic assetsTHE EQUALITY OF NET EXPORTS AND NET CAPITAL OUTPUT- An accounting identity: NX=NCOo Arises because every transaction that affects NX also affects NCO by the same amount and vice versa- When a foreigner purchases a good from the US:o US exports and NX increaseso The foreigner pays with currency or assets, so the US acquires some foreign assets, causing the NCO to rise- When a US citizen buys foreign goodso The US imports rises and NX fallso The US buyer pays with US dollars or assets so the other country acquires US assets causing NCO to fallSAVING, INVESTMENT, AND INTERNATIONAL FLOWS OF GOODS ANDSERVICES- Y=C+I+G+X is an accounting identity- Y-C-G=I+NX is a rearrangement of terms- S=I+NX so since S=Y-C-G (national savings) in an open economy:o S=I+NCO- Then S-I=NCO and NX- When S>I, then NCO>0 and the excess loanable funds flow abroad in the form of positive net capital outflow (trade surplus)- When S<I, then NCO<0 and foreigners are financing some of the country’s investment in the form of negative net capital outflow (trade