Chapter 31: level of difficulty 2/3

Chapter 31 dealt with an open economy where interaction with other economies in the world occurs freely. In such case there are two usages, the buying and selling of goods and services(product markets) and the buying and selling of assets such as stocks and bond (world-financial markets). Allowing the flow of goods to be imports and exports with a net exports, or value of a country's exports minus the value of the countries imports, this also being trade balance. In all there are also financial resources including new capital outflow which is calculated as purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners. Thus, new capital outflow must equal net exports, since imports and exports happen during trade. Trade deficits happen when exports are less than imports and net exports are less than 0. Balanced trade happens when exports and imports are equal and net exports are equal to 0. While trade surpluses happen when exports are greater than imports and net exports are greater than 0. Saving, investment and capital have a relationship that is determined by manipulating the identity discovered in the previous chapters, that being y=c+I+g+NX to determine GDP, therefore the new equation becomes S=I+NX, or savings equal investment plus new capital outflow. Nominal exchange rates are the rate at which a person can trade the currency of one country for the currency of another, where values may appreciate or depreciate. Real exchange rates on the other hand are the rates at which goods and services are traded.