Macroeconomics

5-1

The International Flows 

of Capital and Goods

The key macroeconomic difference between open and closed economies is that,

in an open economy, a country’s spending in any given year need not equal its

output of goods and services. A country can spend more than it produces by bor-

rowing from abroad, or it can spend less than it produces and lend the difference

to foreigners. To understand this more fully, let’s take another look at national

income accounting, which we first discussed in Chapter 2.

The Role of Net Exports

Consider the expenditure on an economy’s output of goods and services. In a

closed economy, all output is sold domestically, and expenditure is divided into

three components: consumption, investment, and government purchases. In an

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P A R T   I I

Classical Theory: The Economy in the Long Run