This chapter discusses open-economy macroeconomics and the balance of payments. It defines key terms like the balance of payments, current account, capital account, and exchange rates. It also explains the relationship between exchange rates, imports/exports, and domestic output and prices in an open economy. Flexible exchange rates are determined by supply and demand in the foreign exchange market. The value of a currency is influenced by factors like inflation rates, interest rates, and purchasing power parity across countries.