Book: Openness In Goods And Financial Markets

Question 1

What is openness in the goods market

Answer 1

The ability of consumers to choose between domestic and foreign goods, the existence of tariffs and import quotas

Question 2

What is openness in the financial market

Answer 2

The ability of investors to choose between domestic and foreign assets, capital controls limits this

Question 3

What is openness in factor market

Answer 3

The ability of firms to choose where to set up production and the ability of workers to choose where they work

Question 4

Can exports exceed gdp

Answer 4

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

Question 5

What is real exchange rate

Answer 5

The difference in price between domestic goods and foreign goods

Question 6

How does opening the economy affect output

Answer 6

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

Question 7

What is nominal exchange rates

Answer 7

The price of one currency in another currency

Question 8

What are appreciations and depreciations of a currency

Answer 8

Appreciation if it becomes more worth compared to the foreign and depreciation if it becomes less.

Question 9

What is it called when a currency with a fixed exchange rate changes

Answer 9

If it increases it is called a revaluation aNd if it decreases it is called a devaluation

Question 10

How is real exchange rate calculated

Answer 10

e = E(xchange rate)*P(£)/P($)
Price of domestic goods in terms of another curency

Question 11

Can the nominal and real exchange rates move in opposite directions

Answer 11

Yes if the difference in either exchange rate or the ratio between prices in the countries is sufficiently large and moves in opposite directions

Question 12

What are bilateral exchange rates

Answer 12

The exchange rate between two countries

Question 13

What are multilateral exchange rates

Answer 13

The composition of trade between one country and all its trading partners

Question 14

What is the balance of payments

Answer 14

The balance of trade and financial exchange between countries

Question 15

What are above the line transactions

Answer 15

Transactions to and from the rest if the world, the current account transactions

Question 16

What us the income balance

Answer 16

The balance of gains from foreign assets and payments to foreign individuals for their ownership of domestic assets

Question 17

What is the current account balance, surplus and defecit

Answer 17

The sum of trade balance and the income-balance, positive is surplus and negative is deficit

Question 18

What does a current account surplus and deficit imply

Answer 18

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

Question 19

How can a country finance a defecit

Answer 19

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

Question 20

What are net capital flows

Answer 20

Net capital transfers plus net change in balance between foreign ownership of domestic assets and vice versa

Question 21

What is another name for net capital flows

Answer 21

Financial account balance aka the change in national indebtedness to the outside

Question 22

Should the net capital transfers and net capital flows be equal to the current account balance

Answer 22

Yes but actually no they are constructed using different sources so there is a statistical discrepancy

Question 23

How is gno calculated

Answer 23

Gdp + NI(net income payment)

Question 24

What is the uncovered interest parity relation

Answer 24

(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

Question 25

What is a simplified version of the intrest parity condition

Answer 25

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