Chapter 31

Chapter 31 discusses the macroeconomics of open markets. Next exports are the value of the domestic goods and services that are sold outside of the original nation that produced them, minus the foreign goods and services that are brought into and sold in the nation. Net capital outflow is the purchasing or acquiring of foreign assets by the domestic residents of the nation minus the purchasing or acquiring of domestic assets by foreigners. Due to the fact that every transaction is the exchange of an asset for a good or service, a nation's net capital outflow is always equal to its net exports. Considering an economy's saving can be used two ways, those being financing investments at home and buying assets abroad, national savings is domestic investment plus net capital outflow. The nominal exchanges rate is the relative price of the currency of two nations while the real exchange rate is the relative price of the goods and services of the two nations.  When nominal exchange rates change so that each dollar buys more foreign currency than previously, then the dollar is appreciating, or gaining value. When the nominal exchange rate for one currency to another decreases, than the dollar is depreciating in value. The theory of purchasing power says that the dollar should be equivalent in purchasing power to those dollars of all other countries. The theory also states that the nominal exchange rate between two countries should also reflect the price level in the two countries.