World Markets in Goods and Credit

Thus far, we have dealt with the macroeconomic performance of a single, closed economy. In particular, we have neglected the interactions among countries on international markets. Until recently, macroeconomic theory was developed in a closed economy framework, mostly because the analysis is simpler under that assumption and because the impact of the rest of the world on the domestic economy was deemed to be small. However, after the opening up of international markets over the last two decades, the practice of ignoring the rest of the world has become increasingly unsatisfactory. This is especially true for Europe in which international trade is an essential component of economic activity.