Chapter 12 - Open Economy Macroeconomics Flashcards Preview

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Flashcards in Chapter 12 - Open Economy Macroeconomics Deck (23):
1

Net Exports (also called _____) =

value of exports - value of imports
-also called trade balance

2

Variables for Net Exports are... (6)

1. Consumer preferences (foreign + domestic); 2. Prices;
3. Incomes; 4. Exchange rates; 5. Government Policies;
6. Transportation Costs

3

Trade deficit is...

imports > exports

4

Trade Surplus is...

imports < exports

5

Net Capital Outflow is...
-also called_____

domestic purchase of foreign minus foreign purchase of domestic
-also called net foreign investment

6

Flow of Capital Abroad is in 2 forms:

1. Foreign Direct Investment (own + operate foreign investment)
2. Foreign Portfolio Investment (stock/bond purchase to incr LF Supply in foreign)

7

Capital Outflow...

NCO>0

8

Capital Inflow

NCO<0

9

Variables for NCO (3)

1. Real interest rate paid (f+d)
2. perceived risk in foreign country
3. gov't policy on foreign domestic purchase

10

Accounting Identity...

every transaction that affects NX also affects NCO by same amount (+ vice versa)

11

Formula: S=I+NCO
-when S>I...
-when S

-excess L funds abroad (so +'ve NCO)
-foreigners finance domestic investment (so -'ve NCO)

12

Nominal Exchange Rate is...

one country's currency exchanging for another's
-eg. Canadian $/peso

13

Appreciation...

incr in value of domestic currency compared to how much foreign currency it can buy

14

Depreciation...

decreased value of domestic money compared to amount of foreign money it can buy.

15

Real Exchange Rate is...
-formula =

G/S trading in one country for G/S trading in another.
-formula: (e x P)/P*
--where: P=domestic P; P*=foreign P; e=nominal exchange rt

16

Law of one Price...

notion that G should sell for the same in all markets b/c if don't then arbitrage can occur. If transported w/o cost can sell cheaper goods which drives up their price and down the other until equal.

17

Arbitrage is...

buy cheap goods in one market + transport w/o cost to sell in a more expensive market.

18

Purchasing Power Parity is...
-implies...

exchange rate theory where a unit of any currency should purchase same Q of Goods everywhere.
-implies that nominal exchange rates adjust to balance P of baskets across countries

19

Formula for PPP theory...

- e = (P*/P)
---nominal exchange rates b/w two countries should equal P levels.

20

PPP theory example.
-if inflation rates differ: 1. higher in Mex than Can.
2. higher in Can than Mex.

1. then P* rises (dollar appreciates vs. peso)
2. then P rises (dollar depreciates vs. peso)

21

Limitations of PPP Theory (2)

1. Many G/S cannot be traded (eg. haircuts)
2. Foreign + domestic G not perfect subs.

22

PPP theory results suggest that the higher inflation causes faster depreciation (t/f)

true

23

Real Interest Parity is...

in open markets (w/ full access in and out) the inflation rate in Canada should mirror the inflation rate in the world
- r = r (world)