MacroeconomicsI_working_version (1)

126
Chapter 14
There is an obvious effort to remove the borders among nations in today’s world.
Globalisation and internationalisation have become frequent terms. In this chapter we will
examine the main linkages among the open economies and explain some main
characteristics, variables and relations influencing international trade.
Any economy is linked to the rest of the world through two broad channels: trade (in goods
and services) and finance.
The international trade linkages include imports and exports as the trade channel among
economies. It is usual for a modern economy that some part of country’s production is
exported to foreign countries whereas some goods that are consumed or invested in
domestic country are produced and imported from foreign countries. Let’s present some
examples of relatively closed and relatively open economies in the world. Whereas the
United States is relatively closed economy, Netherlands is the opposite case. Dutch exports
and imports each amount to about 60 percent of GDP, while in the case of USA it is
roughly 10 percent 1 .
International trade linkages are still important for the relatively closed economies as well as
for the relatively open economies. Part of the income spent by domestic residents is spent
on imported goods. This part is not spent on domestically produced goods and this amount
of spending escapes from the circular flow of income in the economy. Conversely, demand
for domestically produced goods is increased in the amount of exported goods.
In addition, aggregate demand, output and employment are determined by the relative
prices - prices of domestically produced goods compared relatively to prices of competing
goods produced abroad. If domestic prices of competing goods produced in foreign
countries decrease relatively to prices at which domestic firms sell, demand for domestic
goods shifts away toward goods produced in foreign countries. In that case exports fall and
imports rise. In the opposite case when domestic currency depreciates (its value declines
relative to other currencies), exports rise and imports decline because domestic produced
goods become relatively cheaper. In such case domestic and foreign demand move toward
domestic goods
The international financial linkages cover holding of domestic as well as foreign assets
by domestic residents (households, firms, banks, etc.). Even though domestic households
generally prefer holding domestic assets such us government bonds or corporation bonds,
firms, banks and big corporations hold a variety of domestic and foreign assets.
International dealing with assets connects the asset markets around the world and
influences interest rates, exchange rates and thus national incomes in the economies.
14.1. Balance of Payment
The total numbers of all transactions, which take place among the domestic residents and
foreigners, are covered in a nation’s balance of payment. It involves exports and imports of
goods and services, tourist expenditures, dividends or interest obtained or paid abroad, and
purchases and sales of financial or real assets abroad.
1 See Dornbush – Fischer – Starz [7]