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Sem 5 Prep
← Open Economy MacroWhat an open economy is

Formulas for this chapter

Aggregate demand in an open economy

AD = C + I + G + (X - M)

Any question that asks for the level of demand or the contribution of the foreign sector. Compute net exports separately, with its sign, before adding.

C
Consumption expenditure by households
I
Planned investment expenditure
G
Government expenditure on goods and services
X - M
Net exports: exports minus imports, an injection when positive and a leakage when negative

Openness ratio

Openness % = (X + M) / AD x 100

Measuring how exposed an economy is to the rest of the world. Note that this is a gross measure: it adds exports and imports, while the trade balance subtracts them.

X + M
Gross trade: exports plus imports, both counted positively
AD
Aggregate demand, computed first from the identity above

Percentage change in the exchange rate

% change in R = (R(new) - R(old)) / R(old) x 100

Whenever a question moves the rate and asks by how much the currency has depreciated or appreciated. R is domestic currency per unit of foreign currency, so a rise in R is a depreciation of the domestic currency.

R
Units of domestic currency per unit of foreign currency, for example Rs per US dollar
R(old)
The starting rate, and always the denominator
Step 4 of 23
Quick checkTheory

Which item is part of the professors' definition of an open economy but is often left out by students?

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