Answered: An open economy interacts with the rest…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true:

Net capital outflow = net capital

In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold.

Suppose you are a software engineer living in the United States, and you just sold your latest product to a Russian consumer for RUB 7,000.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

Because of the identity equation that relates to net exports, the in U.S. net exports is matched by in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply.

-You store the rubles in your safety deposit box at home.

-You buy RUB 7,000 worth of Russian bonds.

-You purchase RUB 7,000 worth of stock in a Russian corporation.

**Table: Economic Indicators of Trade**

- **Title:** Magnitude of Change (Rubles)

| **Indicator** | **Direction of Change** | **Magnitude of Change (Rubles)** |
|------------------|-------------------------|----------------------------------|
| **Exports** | Decrease | [ ] |
| **Imports** | Decrease | [ ] |
| **Net Exports** | Decrease | [ ] |

**Explanation:**
This table illustrates key economic indicators related to trade.

- The **Direction of Change** column indicates that exports, imports, and net exports are all experiencing a decrease, as shown by the downward arrows.

- The **Magnitude of Change** column is marked for input in rubles, where the specific amount of change can be recorded.

This type of table is used to track and analyze trade performance over a specified period, providing insights into economic trends and helping to inform policy decisions.

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