Flashcards in Chapter 12 - Open Economy Macroeconomics Deck (23):
Net Exports (also called _____) =
value of exports - value of imports
-also called trade balance
Variables for Net Exports are... (6)
1. Consumer preferences (foreign + domestic); 2. Prices;
3. Incomes; 4. Exchange rates; 5. Government Policies;
6. Transportation Costs
Trade deficit is...
imports > exports
Trade Surplus is...
imports < exports
Net Capital Outflow is...
domestic purchase of foreign minus foreign purchase of domestic
-also called net foreign investment
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)
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
every transaction that affects NX also affects NCO by same amount (+ vice versa)
-excess L funds abroad (so +'ve NCO)
-foreigners finance domestic investment (so -'ve NCO)
Nominal Exchange Rate is...
one country's currency exchanging for another's
-eg. Canadian $/peso
incr in value of domestic currency compared to how much foreign currency it can buy
decreased value of domestic money compared to amount of foreign money it can buy.
Real Exchange Rate is...
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
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.
buy cheap goods in one market + transport w/o cost to sell in a more expensive market.
Purchasing Power Parity is...
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
Formula for PPP theory...
- e = (P*/P)
---nominal exchange rates b/w two countries should equal P levels.
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)
Limitations of PPP Theory (2)
1. Many G/S cannot be traded (eg. haircuts)
2. Foreign + domestic G not perfect subs.
PPP theory results suggest that the higher inflation causes faster depreciation (t/f)