In this lecture, we will examine the flow of goods, services, and financial assets across countries. We will bring the international sector into the model of the economy developed earlier in the course. We will look at the effects of changes in net exports on the economy. We also will look at the effects of changes in exchange rates and their bearing on the flow of products and financial assets. Upon completion of this lecture, you should understand and be able to answer these key questions:
1. The United States has run a trade deficit for a long time. Does this mean that the balance of payments is out of balance?
2. How will the presence of the foreign sector affect the multiplier?
3. What is the exchange rate and what causes it to change?
4. Can a fall in the value of the dollar ever be good for the United States?
5. Does the presence of the foreign sector help or hinder stabilization policies?