Chapter Twenty-

Nine:

The Global Economy and

Policy

Macroeconomics in a Global Context

United States

World

Figure 29.1: Trade Expressed as a Percentage of Production, World and the United States, 1960-2010

Source: World Development Indicators, World Bank, 2012.

Figure 29.2: Top Purchasers of Goods from the United States and Suppliers of Goods to the United States, 2012

Source: U.S. Census Bureau, Foreign Trade Statistics, Top Trading Partners, 2012.

The Trade Balance: Completing the Picture

Output (Y) Income (Y)

Spending (AD)

Exports (X)

Government spending (G)

Intended investment (II)

Imports (IM)

Consumption (C)

Savings (S)

Taxes (T)

Production generates income to

householdsleakages

injections

Figure 29.3: Leakages and Injections in a Complete Macroeconomic Model

International Finance

Quantity of Dollars

Eu

ros

per

Do

llar E

D

S

Figure 29.4: A Foreign Exchange Market

Quantity of Dollars

Eu

ros

per

Do

llar

D

S1

E1

S2

Depreciation of the Dollar

E2

Figure 29.5: A Supply Shift in a Foreign Exchange Market

Table 29.1: U.S. Balance of Payments Account (2011, billions of dollars)

Source: U.S. Bureau of Economic Analysis, U.S. International Transactions Accounts Data, table 1, with rearrangements and simplifications by authors.*Also includes the net value of financial derivatives (financial instruments whose values are linkedto an underlying asset, interest rate, or index, such as futures or options).

Figure 29.6: U.S. Imports and Exports of Goods and Services, 1960-2012

Source: BEA NIPA Tables 4.1 and 1.1.5

Macroeconomics in an Open Economy

Expansionary monetary policy

Lowers interest rates

Investment is encouraged

Aggregate demand rises

Equilibrium GDP rises

Reduces capital inflows

Reduces demand for dollars, leading to depreciation

Reduces imports and increases exports

Quantity of the Domestic Currency

Un

its

of

Fo

reig

n E

xch

ang

e

Per

Un

it o

f D

om

esti

c C

urr

ency

Dmarket

e*

Smarket

Dwith intervention

Surplus without intervention

Figure 29.7: Foreign Exchange Intervention