APPENDIX

Many countries wish to maintain their freedom to carry out domestic macroeconomic policy without adverse effects from international trade and capital flows. Whether this suggests flexible exchange rates or fixed exchange rates depends on whether the policies are aimed at reducing unemployment or at reducing inflation and on whether they are carried out with fiscal or monetary instruments.

An apparent equilibrium in a single country's macroeconomy may actually involve deficits and surpluses in the country's various international  accounts.

These surpluses or deficits may be in either the country's current or its capital accounts and may be remedied in principle by changes in the country's macroeconomic policies.

Changes in a country's real national income and product affect primarily its trade and current account balances. The effects are inverse. Increases in real national income operate primarily to reduce the current- account balance by increasing imports, and vice versa.

Changes in a country's real interest rates affect primarily its capital- account balance. The effects are direct. Increases in real interest rates operate primarily to attract foreign capital and discourage capital exports.

A looser (tighter) fiscal policy tends to lower (raise) a country's current- account balance and raise (lower) its capital- account balance.

A looser (tighter) monetary policy tends to lower (raise) a country's current-account balance and also to lower (raise) its capital-account balance.

Three international macroeconomic identities assist in understanding relationships between the international and the domestic dimensions of the economy. These identities are

  Y=C+I+G+X-Im

(1 - S) + (G - Tn) + (X - Im) = 0

 (X - /m ) + ( Imx - Xx ) - BP = 0

Negative U.S. balances on current account have been balanced by positive balances on capital account-the purchase of U.S. assets by foreigners. It has been feared that this may impair U.S. control of its resources and also the autonomy of its macro  economic policy.

Applications of international macroeconomic identities reveal that the effects of legislation, such as trade shifting and the omnibus trade act, depend on accompanying actions taken in the domestic economy.

The U. S. budget deficit is associated with its current account deficit only because the U.S. private sector is investing more than it saves.