STUDY UNIT 5

Question 1

What does openness in the factor market refer to?

Answer 1

it refers to the ability of firms to choose where to locate production and of workers to choose where to work

Question 2

what is a good example of openness in the factor market?

Answer 2

multinational companies, such as Cadbury and Volkswagen operate plants in many countries and move their operation around the world to take advantage of low costs

Question 3

what does openness in the goods market refer to?

Answer 3

it refers to the ability of consumers and firms to choose between domestic and foreign goods. In no country is this choice completely free from restrictions such as tariffs and quotas

Question 4

what is the most popular way of measuring the openness of the goods market?

Answer 4

to express imports and exports as a percentage of GDP

Question 4

What are the two ways in which the nominal exchange (E) can be defined?

Answer 4

1. the price of foreign currency in terms of the domestic currency ($1=R) (direct method)
2. the price of domestic currency in terms of foreign currency (R1=$) (indirect method)

Question 5

what is appreciation?

Answer 5

it is when the price of the domestic currency (R) in terms of the foreign currency increases.

eg. a change from R1=40.0650 to R1=$0.0695 implies an increase in the nominal exchange because the rand is worth more

Question 6

what is depreciation?

Answer 6

it is when the price of the domestic currency in terms of the foreign currency decreases

eg. a change from R1=$0.0650 to R1=$0.0600 implies a decrease in the nominal exchange rate because the rand is weaker

Question 7

what does the real exchange rate tells us?

Answer 7

it tells us what happens to the relative price of domestic goods in terms of foreign goods

Question 8

what’s the formula for the real exchange?

Answer 8

e= EP/P*

where E is the nominal exchange rate
P is the domestic price level
P* is the foreign price level