3. Open Economy Macroeconomics Flashcards
What type of economy is New Zealand?
Small open economy
- buying and selling goods and services in world product markets
- buying and selling financial assets
Trade Balance
Value of a nation’s exports minus the value of its imports (Net Exports)
Trade Surplus
Exports > Imports
Trade Deficit
Exports < Imports
Balanced Trade
Exports = Imports
Current Account Balance (CAB)
The sum of net exports (NX) and net foreign income (NFI)
CAB = NX + NFI
Net Capital Outflow (NCO)
Purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
The purchase of a foreign asset by a domestic resident has what form of impact on NCO?
Positive
The purchase of a domestic asset by foreigner has what impact on NCO?
Negative
Capital Account Balance (KAB)
Difference between total receipts from the sale of domestic assets to foreigners and total payments abroad
NCO is equal to…
negative of the capital account balance (KAB)
Purchases of an investment is recorded in…
The Capital Account (KAB)
Balance of Payments Condition
The CAB must equal NCO
2 uses for domestic savings in an open economy
- Domestic Investment
2. Purchase of Foreign Assets
2 sources of domestic investment in an open economy
- Domestic Savers
- Foreign Funds
- If S < I, part of investment financed from abroad, decrease in NCO, foreigners gain claim on domestic assets
- If S > I, part of savings funds are investment abroad, increase in NCO, domestic residents gain a claim of foreign assets
Nominal Exchange Rate
Rate at which a person can trade the currency of one country for the currency of another
Ways to express exchange rate
Units of foreign currency per unit of domestic currency (USD$0.82 per NZ dollar)
Appreciation
Increase in the value of a currency as measure by the amount of foreign currency it can buy (strengthening of the dollar)
Depreciation
Decrease in the value of a currency as a measure by the amount of foreign currency it can buy (weakening of the dollar)
Trade-weighted Index
An exchange rate index for the NZ dollar that comprises the currencies of Australia, the Euro zone, Japan, US and UK
Real Exchange Rate
Rate at which a person can trade the goods and services of one country for the goods and services of another country
The Real Exchange Rate is a key determinant of…
Net exports of goods and services
Depreciation in NZ real exchange rate
NZ goods become cheaper relative to foreign goods - exports rise, NX rises
Appreciation in NZ real exchange rate
NZ goods become more expensive relative to foreign goods - imports rise, NX falls
