ABSTRACT
The basic elements of the open economy, the balance of payments and the exchange rate, have been introduced in Chapter 12. We have explained the adjustment mechanisms under various exchange rate regimes in Chapter 13. These are the building blocs we need to construct our first model of the international macroeconomy. We start with a simple model, because economists employ models to help understand solutions to problems that are too complex to work out explicitly. If a real-world problem cannot be solved at first, it is helpful to break it down into several components. This implies a simplification of the real world that helps us understand one specific part of the problem at a time. Once we have understood that one part, we can expand the model to render it more realistic allowing us to understand a broader section of the complex world. Brilliant model builders have a gift for choosing the crucial parts of the complex world that can be simplified to gain powerful insights.
