“You should see, when they come in the door, the shopping
bags they hand off to the coat check. I mean, they’re just
spending. It’s Monopoly money to them.” So declared a
New York restaurant manager, describing the European
tourists who, in the summer of 2008, accounted for a large
share of her business. Meanwhile, American tourists in Eu-
rope were suffering sticker shock. One American, whose
family of four was visiting Paris, explained his changing va-
cation plans: “We might not stay as long. We might eat
cheese sandwiches.”
It was quite a change
from 2000, when an arti-
cle in the New York Times
bore the headline: “Dol-
lar makes the good life a
tourist bargain in Eu-
rope.” What happened?
The answer is that there
was a large shift in the
relative values of the euro,
the currency used by
much of Europe, and the
U.S. dollar. At its low
point in 2000, a euro
was worth only about
85 cents. By mid -2008 it was worth more than $1.50, and
in early 2010 it’s value had fallen again, to less than $1.28.
What causes the relative value of the dollar and the
euro to change? What are the effects of such changes?
These are among the questions addressed by open -
economy macroeconomics,the branch of macroeconomics
that deals with the relationships between national
economies. In this section we’ll learn about some of the
key issues in open - economy macroeconomics: the deter-
minants of a country’s
balance of payments,the
factors affecting ex-
change rates,the differ-
ent forms of exchange
rate policyadopted by
various countries, and
the relationship be-
tween exchange rates
and macroeconomic
policy. In the final
module we will apply
what we have learned
about macroeconomic
modeling to conduct
policy analysis.Module 41Capital Flows and the Balance
of Payments
Module 42The Foreign Exchange Market
Module 43Exchange Rate Policy
Module 43 Exchange Rate Policy
Module 44Exchange Rates and
Macroeconomic Policy
Module 45Putting It All Together
Economics by Example:
“Is Globalization a Bad Word?”
section
The Open
Economy:
International
Trade and
Finance
8
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