chapter  7
17 Pages

International factor movements

This chapter examines how changes in the real exchange rate affect Gross Domestic Product (GDP) and describes a general model of output and price determination for an open economy. Unlike macroeconomics, the focus of the chapter is on one particular component of aggregate demand and aggregate supply the current account. It discusses wealth and consumption focused on how changes in the price level affected wealth. By aggregate demand and aggregate supply complete, it can determine an open economy's equilibrium price level and real output. The chapter considers short-run factors that tend to influence a country's current account balance. Because real exchange rate changes impact the current account, it can link real exchange rate changes to changes in the domestic economy's output. The chapter also examines the long-run effects of changes in exchange rates on the composition of output in an open economy. It considers the effect of real exchange rate changes on the composition of a country's output.