CHAPTER 19

*note: we are talking about the real exchange rates ha

Demand for Domestic Goods
- Consumption, Investment, Government Spending - DOMESTIC DEMAND FOR GOODS
- Imports (na divided sa real exchange rate) - DOMESTIC DEMAND FOR FOREIGN GOODS
- Exports - DEMAND FOR DOMESTIC GOOD
Kapag open ang economy
- Not much changes on the first three variables. Depende pa rin sila sa INCOME.
- Exchange rates may affect these variables, but doesn't change the TOTAL AMOUNT
of these.
Determinants of Imports
- Higher domestic income = higher imports
- Higher real exchange rates = higher imports
- Imports = positive domestic income, positive real exchange rates
Determinants of Exports
- Exports - positive foreign income, negative real exchange rates
Putting the Components together (x-axis: output; y-axis: demand)
- DOMESTIC DEMAND FOR GOODS - upward sloping
- DEMAND FOR DOMESTIC GOODS - domestic demand for goods - imports + exports
- TRADE BALANCE - downward sloping
- Sa graph, mas flat ang imports kesa sa domestic demand. imports kasi is demand
for domestic goods total demand is also comprised by the foreign. so yun!
- note: EXPORTS DO NOT DEPEND ON DOMESTIC INCOME, BUT RATHER ON FOREIGN INCOME
- Positive Output = positive import, unaffected exports, negative net exports
Equilibrium Output and the Trade Balance
- Equilibrium ang goods market kapag: Domestic Output = Total Demand for Goods
INCREASES IN DEMAND, DOMESTIC OR FOREIGN
Increases in Domestic Demand
- Kapag nag-increase ang govt spending, magi-increase ang domestic demand at out
put.
- In an open economy, mas maliit ang epekto ng govt spending sa output compared
sa closed economy dahil sa presence ng DEMAND FOR FOREIGN GOODS
- Trade Deficit
- IN SHORT: Sa open economy, mas maliit ang epekto sa output pero mas malaki epe
kto sa trade balance
Increases in Foreign Demand
- Higher foreign output = Higher income
- Increase foreign demand, increase domestic demand, trade surplus
- Parehas na nagi-increase ang imports at exports (due to increase in foreign ou
tput and domestic output) pero hindi nao-offset ng imports yung exports kaya pos
itive ang balance ng net exports.
Fiscal Policy Revisited
- Shocks in demand sa country mo will also affect other countries. Nakikipag-tra
de ka, may interaction ka with them, so apektado talaga sila.
- Mahirap mag-isip ng fiscal policy due to lack of coordination
* Syempre, trading yan. Konektado. Ang key parang walang nagkakasapawan ay coor
dination.
* Bakit walang coordination?

1. Ayaw nila yung gusto ng ibang countries

2. Trip nilang mag-talkshit para more benefit on their part
DEPRECIATION, TRADE BALANCE AND OUTPUT
Kapag nagkaroon ng depreciation?
- exports will increase kasi mas mura price ng goods mo
- imports will decrease kasi bababa yung demand mo sa goods ng ibang bansa
- relative prices of foreign goods over domestic good, increases
- MARSHALL LERNER CONDITION
- demand relation and net exports relation shift up.
- more shifting to domestic goods, trade surplus, increase in domestic output
- dapat mas mahal ang foreign goods for DEPRECIATION to work! :-)
Combining Exchange Rate and Fiscal Policies (govt spending)
How to achieve a perfect chorva (haha di ko alam putek)
1. Achieve a depreciation to eliminate trade deficit
2. Syempre, depreciation leads to more output. So may risk na lumaki imports. So
para ma-eliminate yung increase sa output, mag-set ka ng fiscal contraction meh
ehe
In short, fiscal policies affect output. Exchange rates affect trade balance.
J-CURVES
- Katulad ng dati, hindi instant ang changes ng mga variables
- Depreciation will likely affect first the prices before the outputs
- Kaya sa bandang una, magkakaroon muna ng trade deficit (higher price levels wi
ll decrease exports (ata) hehe) pero as time pass by, lumalakas na ang epekto. S
o, mag-apply na yung effects
- Sinasabi lang nito na sa una, pwedeng kabaligtaran ng expected effect yung man
gyayari
SAVINGS, INVESTMENT AND TRADE BALANCE
- Net Exports = Savings + (Taxes - Govt Spending) - Investment
- Ibig sabihin, kapag may trade surplus ka e may maipapahiram ka sa mundo (exces
s of saving). Kapag may trade deficit naman, kailangan mong i-finance yung defic
it kaya manghihiram ka sa mundo (excess of investment)
- Increase in investments will either increase private/public saving or will det
eriorate the trade balance
- Increase in budget deficit will increase private saving, decrease investment o
r decrease ng trade balance
- High Saving Rate = high investment rate, incease in trade balance
- Kapag nagkaroon ka ng budget deficit, hindi matik na magkakaroon ka ng trade d
eficit! NOTE YAN ;)