6 Lecture 6: The elasticity approach to the trade balance. Mundell-Fleming

• NX measured by household production is equal to the product of the export (domestic production) minus the import (overseas production) times the foreign relative price.

• J-curve: In the short term, the condition of Marshall-Lerner may not be established. In the short term, since the import and export volume does not change so much, the price effect may dominate.

γ = ž (complete capital movement). LOP does not hold (arbitrage transaction of transaction does not know nominal exchange rate)

• MRLE represents medium market equilibrium of the labor market, equilibrium of the IS commodity market, equilibrium of the LM asset market. This model assumes extrinsic depreciation projections.

• The financial aspect of the model is the same as the currency model. The only difference is that the actual exchange rate is not determined by labor market and commodity market but by labor market and commodity market.

• With flexible exchange rates, the impact of currency quotes affects only price levels and nominal exchange rates. Currency neutrality and classical dichotomy

• At fixed exchange rates, the central bank does not manage money supply. Since E is fixed, you can not raise the price level M decided in the labor + commodity market.

• The increase in total demand is related to the rise in the real exchange rate and the deterioration in the trade balance. Intuition: Increasing demand for traders

• Same as currency model. (A) Exogenous growth of money supply does not affect nominal interest rates; (b) Increase in nominal interest rate is related

• Volatility of the product market. The shock of commodity market conditions (fiscal policy etc) can not affect demand and output level, it only changes the composition of domestic demand and external demand.

• The currency market is unstable. The shock of money market (fluctuation of money supply etc.) may affect demand and output level. From a fixed price perspective, an expansionary monetary policy

• Consistent with empirical evidence, note that the nominal trading rate and the actual trading rate are positively correlated with both cargo shock and currency market shock. Also, at least

• Volatility of the product market. The shock of commodity market (fiscal policy etc.) may affect demand and output level. Extended fiscal policy raises interest rates above this level

• The currency market is unstable. Money market shocks (such as money supply fluctuations) do not affect demand and production levels. From a fixed price perspective, the extended currency

• Because monetary policy is endogenous, it is not effective at fixed exchange rates. Since nominal exchange rate and real exchange rate can not be changed, it is not possible to adjust production to secure the money market.

Mandel - Fleming's exchange rate effect is an extension of the IS - LM model. Traditional IS-LM models include closed economies, but Mandel Fleming explains a small open economy. The Mandelle-Fleming model shows the short-term relationship between economic nominal exchange rate, interest rate and production (contrasting with the closed economy IS-LM model focusing only on the relationship between interest and production) In a word. The aggregate demand curve shows two factors, the relationship between the required production volume and the total price level. The aggregate demand indication depends on the fixed level of the nominal money supply. There are many factors that can change the AD curve. A shift to the right is caused by an increase in money supply, an increase in government spending, or an autonomous element of investment or consumer spending, or a reduction in taxes.

Theoretical framework deals with exchange rates - theories of trade equilibrium relations can be divided into three categories: resiliency, absorbency and monetary method. In a flexible approach, the impact of exchange rate changes on the trade balance depends on supply and demand. * XM = and XM = * (3) Assuming that the price rule dominates the perfect competitive market, you can write * PERP × =. ER is the exchange rate between the local currency and foreign currency. Therefore, from the formulas (1) - (3), the trade balance (TB) defined as the difference between the export amount and the import amount can be specified as follows.

With a flexible approach, the trade balance adjustment pass is based on the elasticity of import and export demand. Demand elasticity is defined as the quantitative response of demand goods or services to price fluctuations. Although the elasticity method is often called the Bickerdike-Robinson-Metzler condition, in fact Bickerdike was originally developed method, and by modeling nominal import and export prices as a function of import and export volume, this approach We have laid the foundation. Later Robinson and Metzler contributed to a flexible approach by clarifying Bickerdike's new concept and explaining in detail.