29. Open Economy Macroeconomics. (Balance of Payments, Exchange Rates, ppp). Открытая экономика (платежный баланс, обменные курсы валют, ппс)

Open economy is a market economy mostly free from trade barriers and where exports and imports form a large percentage of the GDP. No economy is totally open or closed in terms of trade restrictions, and all governments have varying degrees of control over movements of capital and labor. Degree of openness of an economy determines a government's freedom to pursue economic policies of its choice, and the susceptibility of the country to international economic cycles. An open economy interacts with other countries in two ways: it buys and sells goods and services in world product markets; it buys and sells capital assets in world financial markets.

Currencies are traded in the foreign exchange market. The prices at which currencies are traded - exchange rates. When a currency becomes more valuable in terms of other currencies, it appreciates & vice versa. The equilibrium exchange rate: Q_D in the foreign exchange market = the Q_S. Real exchange rate = nominal exchange rate*(Price level index of foreign economy/Price level index of domestic economy). The purchasing power parity between 2 countries’ currencies is the nominal exchange rate at which a given basket of goods & services would cost the same amount in each country (a good predictor of actual changes in the nominal exchange rate). An exchange rate regime is a rule governing policy toward the exchange rate. 3 types: fixed (the exchange rate is kept against some other currency at a particular target), floating (the exchange rate go whatever the market takes it) & managed floating (exchange rate is determined by S&D, but can be altered by the government). Government purchases or sales of currency in the foreign exchange rate are exchange market intervention which requires them to hold foreign exchange reserves that they use to buy any surplus of their currency. Alternatively, they can change domestic policies, especially monetary policy, to shift the demand and supply curves in the foreign exchange market. Finally, they can use foreign exchange controls. The exchange rate regime dilemma: fixed exchange rate encouraging international trade by reduction of uncertainty but it’s costly to hold large foreign exchange reserves + it’s hard to use monetary policy. Under floating exchange rates, expansionary monetary policy works in part through the exchange rate: cutting domestic interest rates leads to a depreciation, and through that to higher exports and lower imports, which increases aggregate demand. Contractionary monetary policy has the reverse effect.

Balance of payments - summary of the country’s transactions with other countries. 2 parts: current account & financial account. Current account (doesn’t create liabilities) is the balance of payments on goods & services (Ex-Im) + net international transfer payments + factor income. Merchandise trade balance is the Ex-Im of goods only. Financial account (does create liabilities) measures its net sales of assets to foreigners or it’s a measure of capital inflows available to finance domestic investment spending. CA+FA=0. So any change in the balance of payments on financial account generates an equal & opposite reaction in the balance of payments on current account & vice versa. Loanable fund model. The difference in interest rates across countries determine the flows of capital (the higher rate, the higher the inflow & vice versa). The interest rate within a country is determined by domestic S&D for loanable funds (internal savings).There is a general interdependence: higher int rate (exchange rate)=>higher sales of fin assets & lower sales of goods & services & vice versa.