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Flashcards in Chapter 19 Deck (82):
1

Balance of payments accounts

A summary of the country's transactions with other countries

2

Factor income

The income countries pay for the use of factors of prodution owned by residents of other countries

ex. interest paid on loans from overseas; profits of foreign-owned corporations; disneyland paris profits, wages of an American engineer who works temporarily on a construction site in Dubai are counted in the second column

3

International transfers

Funds sent by residents of one country to residents of another

ex. remittances that immigrants, such as mexican born workers employed in U.s., send to their families in their country of origin

4

Most of sales involved in Official asset sales and purchases involved _____________________

the accmumulation of foreign exchange reserves by the central bank of China and oil-exporting countries

5

Purchase of Ford Motor Company's Volvo brand by the Chinese company Greely Automobile

Private sales and purchases of assets: payments from foreigners

6

Purchases of European stocks by U.S. investors 

Private sales and purchases of assets: payments to foreigners

7

The balance of payments accounts distinguish between _______________________

transactions that don't create liabilities and those that do

8

Balance of payments on current account; current account

Its balance of payments on goods and services plus net international transfer payments and factor income

9

Balance of payments on goods and services

The difference between its exports and its imports during a given period

*most important part of the current account

10

Merchandise trade balance

or

"trade balance"

The difference between a country's exports and imports of goods

*doesn't include services

**used because data on international trade in services aren't as accurate as data on trade in physical goods, and they are also slower to arrive

11

The current account consists of international transactions that _____________

don't create liabilities

12

Balance of payments on financial account

or

"financial account"

or

"capital account"

The difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period

*international transactions that do create future liabilities are included here

13

Financial account surplus:

the value of the assets it sold to foreigners was more than the value of the assets it bought from foreigners

14

current account deficit

the amount it paid to foreigners for goods, services, factors, and transfers was more than the amount it received

15

Current and financial account formula

Current account (CA) + Financial Account (FA) = 0

CA = -FA

16

Gross national product

includes international factor income

17

Why do economists use GDP rather than a broader measure?

1. original purpose of national acounts was to track production rather than income

2. Data on international factor income and transfer payments are generally considered somewhat unreliable

18

Circular flow diagram equation

Positive entries on current account - Negative entries on current account + Positive entries on financial account - Negative entries on financial account = 0

19

Financial account measures what?

measures a country's net sales of assets to foreigners

20

A country's financial account is a measure of _______________

capital inflows

21

Capital inflows

Foreign savings that are available to finance domestic investment spending

22

Direct foreign investment

When companies build factories or acquire other productive assets abroad

23

exchange rates

The relative values of different national currencies

24

Capital tends to flow from ________________________

slowly growing to rapidly growing economies

25

Government budget deficits ____________________

reduce overall national savings, can lead to capital inflows

26

net capital flows

The excess of inflows into a country over outflows, or vice versa

27

Why aren't out capital flows the same as previous ones?

Migration restrictions

Political risks

28

A country that receives net capital inflows must run a ______________

matching current account deficit

29

A country that generates net capital outflows must run a ________________

matching current account surplus

30

Foreign exchange market

Where currencies are traded

31

Exchange rates

The prices at which currencies trade 

32

Appreciates

When a currency becomes more valuable in terms of other currencies

33

Depreciates

When a currency becomes less valable in terms of other currencies

34

Value of 1 euro goes from $1 to $1.25

Means that the value of US$1 went from 1 euro to 0.80 euro (1/1.25)

Euro appreciated and U.S. dollar depreciated

35

If exchange rate is 1.25 euros = $1

French hotel room is 20% cheaper 

1.25/1

36

If exchange rate is 0.80 euros = US$1

French hotel room is 25% more expensive than American hotel room

1/.80

37

When a country's currency appreciates (becomes more valuable) _________________

exports fall and imports rise

38

When a country's currency depreciates (becomes less valuable) __________________

exports rise and imports fall

39

The quantity of U.S. dollars demanded falls as the number of _____________________

euros needed to buy a U.S. dollar rises

40

The quantity of U.S. dollars demanded rises as the number of ___________________

euros needed bo buy a U.S. dollar falls

41

Why supply curve is upward

The more euros required to buy a U.S. dollar, the more ____________________

dollars Americans will supply

42

Equilibrium exchange rate

The exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied

43

If the demand for U.S. dollars increases (shifts to right)

Equiplibrium number of euro per U.S. dollar rises - dollar apreciates against the euro

Balance of payments on current account falls

Balance of payments on financial account rises

44

Any change in the U.S. balance of payments on financial account generates ___________________________

an equal and opposite reaction in the balance of payments on current account

45

Real exchange rates

Exchange rates adjusted for international differences in aggregate price levels

46

The exchange rate unadjusted for aggregate price levels are sometimes called________________

nominal exchange rate

47

Real exchange rate =

Mexican pesos per U.S. dollar x (Price level us / price level mexico)

48

The current account responds only to changes in _______________________

the real exchange rate, not the nominal exchange rate

49

A country's products become cheaper to foreigners only when that country's currency _______________

depreciations in real terms

50

A country's products become more expensive to foreigners only when the currency ______________

appreciates in real terms

51

Purchasing power parity

The purchasing power parity between two countries' currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country

52

When the nominal exchange rate is ____________ thepurchasing power parity, the basket is cheaper in that country

above

53

What does the nominal exchange rate determine?

The price of imports and exports

 

54

Movements in the exchange rate can have major effects in countries were exports and imports are large percentages of GDP by__________________________

affecting aggregate output and aggregate price level

55

Exchange rate regime

A rule governing policy toward the exchange rate

56

Fixed exchange rate

When the government keeps the exchange rate against some other currency at or near a particular target

57

Floating exchange rate

When the government lets market forces determine the exchange rate

58

Exchange market intervention

Government purchases or sales of currency in the foreign exchange market

59

Foreign exchange reserves

Stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market

60

For governments to keep the value of their currency down through market intervention they must __________________

buy foreign assets

61

Foreign exchange controls

Liscensing systems that limit the right of individuals to buy foreign currency

62

3 ways to support a currency

1. "soak up" the surplus of genos by buying its own currency in the foreign exchange market

2. shift supply and demand by changing monetary policy (increasing interest rates)

3. Reducing the supply of currency to the foreign exchange market - foreign exchange controls -->increases the value of a country's currency

63

To keep the geno from rising above $1.50, the Genovian government can _________________________

sell genos and buy U.S. dollars.

64

How to keep exchange rate below equilibrium?

1. Selling domestic currency and acquiring US dollars, which it can add to its foreign exchange reserves

2. Reduce interest rates to increase the supply of genos and reduce the demand

3. Impose foreign exchange controls that limit the ability of foreigners to buy genos

*all reduce the value of the geno and keep it below equilibrium

65

Additional benefit to adopting a fixed exchange rate: by committing itself to a fixed rate, a country is also committing itself not to _________________________

engage in inflationary policies

66

Costs to fixing the exchange rates

1. a country must keep large quantities of foreign currency on hand - low return investment

2. if they use monetary policy, they must divert from other goals such as stabilizing the economy

3. foreign exchange controls distort incentives for importing and exporting goods and services

4. create substantial costs in terms of red tape and corruption

67

A country that lets its currency float _________________________________________

leaves monetary policy available for macroeconomic stabilization but creates uncertainty for business

68

Fixing the exchange rate ________________________

eliminates the uncertainty but means giving up monetary policies and/or adoipting exchange controls

69

currency crises

Episodes in which widespread expectations of imminent devaluations led to large but temporary capital flows

70

What countries did not adopt the euro?

Britain

Sweden

71

Devaluation

A reduction in the value of a currency that is set under a fixed eschange rate regime

*A devaluation is a depreciation that is due to a revisioin in a fixed exchange rate

72

depreciation

a downward move in currency

73

Revaluation

An increase in the value of a currency that is set under a fixed exchange rate regime

74

Devaluation causes:

Makes domestic goods cheaper => higher exports

Makes foreign gods more expensive => reduces imports

*increases the balance of payments on current account

75

Revaluation causes:

Makes domestic goods more expensive => reduces exports

Makes foreign goods cheaper => increases imports

*reduces the balance of payments on current account

76

Devaluation increases ________________

aggregate demand

can be used to reduce a recessionary gap

77

Revaluation reduces ______________

aggregate demand

*can be used to reduce or eliminate an inflationary gap

78

Devaluations and revaluations serve two purposes under fixed exchange rates:

1. Can be used to eliminate shortages or surpluses in the foreign exchange rate

2. Can be used as tools of macroeconomic policy

79

A reduction in the interest rate's effect on the foreign exchange market graph

Shift supply to the right => genovians invest more abroad, buying more U.S. dollars and selling more genos

Shift demand to the left => foreigners invest less in Genovia, reducing their demand for genos

80

A recession leads to a ________________________ and an expansion leads to a ____________________

fall in imports; rise in imports

81

One of the virtues of a floating exchange rate

Is that they help insulate countries from recessions originating abroad

82