Open Economy: International Trade and Finance

  • Open Economy: International Trade and Finance

    An open economy interacts with the rest of the world both through the goods market and the financial markets, and it is important to understand how a country’s transactions with the rest of the world are recorded in the balance of payments accounts . Students should understand the meaning of trade balance, the distinction between the current account balance and the financial account (formerly known as capital account) balance, and the implications for the foreign exchange market.

    The course should also focus on the foreign exchange market and examine how the equilibrium exchange rate is determined . Students should understand how market forces and public policy affect currency demand and currency supply in the foreign exchange markets and lead to currency appreciation or depreciation . How financial capital flows affect exchange rates, and how appreciation or depreciation of a currency affects a country’s exports and imports should be an integral part of the presentation . Having learned the mechanics of the foreign exchange markets, students should then understand how changes in net exports and financial capital flows affect financial and goods markets.

    It is important to examine what the effects of trade restrictions are, how the international payments system hinders or facilitates trade, how domestic policy actions affect international finance and trade, and how international exchange rates affect domestic policy goals.