Book: Openness In Goods And Financial Markets Flashcards
What is openness in the goods market
The ability of consumers to choose between domestic and foreign goods, the existence of tariffs and import quotas
What is openness in the financial market
The ability of investors to choose between domestic and foreign assets, capital controls limits this
What is openness in factor market
The ability of firms to choose where to set up production and the ability of workers to choose where they work
Can exports exceed gdp
Yes, it can exceed in the function if imports are also high and it makes sense when thinking of production as intermediate goods are not counted
What is real exchange rate
The difference in price between domestic goods and foreign goods
How does opening the economy affect output
As both domestic and foreign consumers now have the choice to buy from the nation or its competitors it can lead to increased wealth if the domestic firms are competitive or it can lead to a decrease if the domestic consumers decide to spend their money on foreign goods instead
What is nominal exchange rates
The price of one currency in another currency
What are appreciations and depreciations of a currency
Appreciation if it becomes more worth compared to the foreign and depreciation if it becomes less.
What is it called when a currency with a fixed exchange rate changes
If it increases it is called a revaluation aNd if it decreases it is called a devaluation
How is real exchange rate calculated
e = E(xchange rate)*P(£)/P($)
Price of domestic goods in terms of another curency
Can the nominal and real exchange rates move in opposite directions
Yes if the difference in either exchange rate or the ratio between prices in the countries is sufficiently large and moves in opposite directions
What are bilateral exchange rates
The exchange rate between two countries
What are multilateral exchange rates
The composition of trade between one country and all its trading partners
What is the balance of payments
The balance of trade and financial exchange between countries
What are above the line transactions
Transactions to and from the rest if the world, the current account transactions
What us the income balance
The balance of gains from foreign assets and payments to foreign individuals for their ownership of domestic assets
What is the current account balance, surplus and defecit
The sum of trade balance and the income-balance, positive is surplus and negative is deficit
What does a current account surplus and deficit imply
A deficit implies that the nation has to borrow from those who export to it and a surplus means the opposite. This is called financial account transactions
How can a country finance a defecit
It can receive so called net capital transfers aka gifts from other countries in the form of debt cancelation or tribute or in an increase of foreigners investing in domestic assets
What are net capital flows
Net capital transfers plus net change in balance between foreign ownership of domestic assets and vice versa
What is another name for net capital flows
Financial account balance aka the change in national indebtedness to the outside
Should the net capital transfers and net capital flows be equal to the current account balance
Yes but actually no they are constructed using different sources so there is a statistical discrepancy
How is gno calculated
Gdp + NI(net income payment)
What is the uncovered interest parity relation
(1+i$(t))=(1+i€(*t))(E/E(t+1))
That the expected rate if return in forign and domestic assets must be the same for them to be equally attractive
What is a simplified version of the intrest parity condition
i~i*-(E(e) - E)/E)
arbitrage implies that domestic interest rate must be equal to the gorign interest rate minus the expected appreciation rate of the domestic currency aka the depreciation rate of the foreign currency
