Chapter 21: Managing an Open Economy
Chapter Learning Objectives
After reading the chapter, you ought to understand and be able to explain:
- The distinction between tradable and nontradable goods and services.
- How the prices of tradables and nontradables are determined and how the ratio of these prices provides a measure of the real exchange rate.
- The definition of external and internal balance and the nature of external and internal imbalances.
- How changes in gross national expenditure (or absorption) and changes in the real exchange rate affect the demand for tradables and nontradables.
- How fiscal and monetary policies can be used to influence absorption and how official exchange-rate policy affects the real exchange rate.
- Why the self-correcting tendencies in the market for tradables and nontradables often fail to cure imbalances quickly.
- How to determine the changes in absorption and real exchange rate needed to correct any situation of external and internal imbalance.
- How to determine the policy changes needed to facilitate stabilization.
- Why two policy instruments generally are needed to achieve simultaneous internal and external balance.
- How foreign aid, foreign capital inflows, or debt relief helps to alleviate the burden of adjustment.
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