Page 661 - The Principle of Economics

A MACROECONOMIC THEORY OF THE OPEN ECONOMY
Over the past decade, the United States has persistently imported more goods and services than it has exported. That is, U.S. net exports have been negative. Al- though economists debate whether these trade deficits are a problem for the U.S. economy, the nation’s business community has a strong opinion. Many business leaders claim that the trade deficits reflect unfair competition: Foreign firms are al- lowed to sell their products in U.S. markets, they contend, while foreign govern- ments impede U.S. firms from selling U.S. products abroad.
Imagine that you are the president and you want to end these trade deficits. What should you do? Should you try to limit imports, perhaps by imposing a quota on the import of cars from Japan? Or should you try to influence the nation’s trade deficit in some other way?
To understand what factors determine a country’s trade balance and how government policies can affect it, we need a macroeconomic theory of the open
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IN THIS CHAPTER YOU WILL . . .
Build a model to explain an open economy’s trade balance and exchange rate
Use the model to analyze the effects of government budget deficits
Use the model
to analyze the macroeconomic effects of trade policies
Use the model
to analyze political instability and capital flight