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Econ 114 > Chapter 12 Open-Economy: basic concepts > Flashcards

Chapter 12 Open-Economy: basic concepts Flashcards

1
Q

Closed economy

A

does not interact with other economies in the world

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2
Q

open economy

A

interacts freely with other economies around the world

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3
Q

Which of the following doesn’t happen in an open economy?

A: It buys and sells goods and services in world product markets.
B: It buys and sells capital assets in world financial markets.
C: It buys and sells foreign currency and capital goods for redistribution and domestic profit.

A

C: that doesn’t even make sense.

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4
Q

Exports

A

domestically-produced goods and services sold abroad

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5
Q

imports

A

foreign produced goods and services sold domestically

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6
Q

Net exports, aka the _____ ______

A

trade balance

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7
Q

Formula: Net exports (NX) =

A

value of exports - value of imports

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8
Q

What do you think would happen to Canadian net exports if:

The U.S. experiences a recession (falling incomes, rising unemployment)

A

canadian net exports would fall due to a fall in American consumer’ purchases of Canadian exports

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9
Q

What do you think would happen to Canadian net exports if:

Canadian consumers decide to be patriotic and buy more products “Made in Canada”

A

Net exports would rise due to a fall in imports

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10
Q

What do you think would happen to Canadian net exports if:

Prices of goods produced in Mexico rise faster than prices of goods produced in Canada.

A

This makes Canadian goods more attractive relative to mexico’s goods.
Exports to Mexico increase
Imports from mexico decrease
*** Net exports increase

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11
Q

Variables that Influence Net Exports: (6)

TTCPIG

A

Transportation costs
The exchange rates at which foreign currency trades for domestic currency
Consumers’ preferences for foreign and domestic goods.
Prices of goods at home and abroad
Incomes of consumers at home and abroad
Govt policies

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12
Q

Trade deficit

A

an excess of imports over exports

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13
Q

Trade surplus

A

an excess of exports over imports

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14
Q

balanced trade

A

when exports = imports

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15
Q

T or F: Trade deficit is always a bad

A

False

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16
Q

Define: domestic residents’ purchases of foreign assets MINUS foreigners’ purchases of domestic assets.

A

Net capital outflow (NCO)

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17
Q

NCO = ____ _____ _____

synonym

A

net foreign investment

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18
Q

When a Canadian resident buys stock in Telmex, the Mexican phone company, the purchase _____Canadian net capital outflow.

A

raises

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19
Q

When a Japanese resident buys a bond issued by the Canadian government, the purchase _______ Canadian net capital outflow.

A

reduces

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20
Q

The flow of capital abroad takes two forms:

foreign investment

A

Foreign direct investment

Foreign portfolio investment

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21
Q

Define: Domestic residents actively manage the foreign investment, e.g., Tim Hortons opens a fast food outlet in Russia

A

Foreign direct investment

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22
Q

Define: Domestic residents purchase foreign stocks or bonds, supplying “loanable funds” to a foreign firm.

A

foreign portfolio investment

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23
Q

Foreign direct investment
Foreign portfolio investment

Which of the above involves residents buying assets located in another country, and which increases net capital outflow?

A

Both

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24
Q

When NCO > 0 termed:

A

capital outflow

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25
Q

When NCO < 0

A

capital inflow

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26
Q

Domestic purchases of foreign assets exceed foreign purchases of domestic assets.

NCO >0 or NCO <0

A

capital is flowing out of the country

NCO >0

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27
Q

Foreign purchases of domestic assets exceed domestic purchases of foreign assets

NCO >0 or NCO <0

A

capital is flowing into the country

NCO <0

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28
Q

Variables that influence NCO

RRPG

A

Real interest rates paid on foreign assets
Real interest rates paid on domestic assets
Perceived risks of holding foreign assets
Govt policies affecting foreign ownership of domestic assets

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29
Q

T or F: real interest rate affects foreign investment

A

True

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30
Q

T or F: restrictions that affect trade, are never undermined

A

False; always undermined.

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31
Q

T or F: every transaction that affects NX also affects NCO by the same amount; but not the other way around.

A

false; same vice versa

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32
Q

When a foreigner purchases a good from Canada, Canadian exports and NX ______. NCO ______.
(increases or decreases)

A

increase; the foreigner pays with currency or assets, so the Canadian acquires some foreign assets, causing NCO to rise

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33
Q

Closed economy

A

does not interact with other economies in the world

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34
Q

open economy

A

interacts freely with other economies around the world

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35
Q

Which of the following doesn’t happen in an open economy?

A: It buys and sells goods and services in world product markets.
B: It buys and sells capital assets in world financial markets.
C: It buys and sells foreign currency and capital goods for redistribution and domestic profit.

A

C: that doesn’t even make sense.

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36
Q

Exports

A

domestically-produced goods and services sold abroad

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37
Q

imports

A

foreign produced goods and services sold domestically

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38
Q

Net exports, aka the _____ ______

A

trade balance

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39
Q

Formula: Net exports (NX) =

A

value of exports - value of imports

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40
Q

What do you think would happen to Canadian net exports if:

The U.S. experiences a recession (falling incomes, rising unemployment)

A

canadian net exports would fall due to a fall in American consumer’ purchases of Canadian exports

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41
Q

What do you think would happen to Canadian net exports if:

Canadian consumers decide to be patriotic and buy more products “Made in Canada”

A

Net exports would rise due to a fall in imports

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42
Q

What do you think would happen to Canadian net exports if:

Prices of goods produced in Mexico rise faster than prices of goods produced in Canada.

A

This makes Canadian goods more attractive relative to mexico’s goods.
Exports to Mexico increase
Imports from mexico decrease
*** Net exports increase

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43
Q

Variables that Influence Net Exports: (6)

TTCPIG

A

Transportation costs
The exchange rates at which foreign currency trades for domestic currency
Consumers’ preferences for foreign and domestic goods.
Prices of goods at home and abroad
Incomes of consumers at home and abroad
Govt policies

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44
Q

Trade deficit

A

an excess of imports over exports

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45
Q

Trade surplus

A

an excess of exports over imports

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46
Q

balanced trade

A

when exports = imports

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47
Q

T or F: Trade deficit is always a bad

A

False

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48
Q

Define: domestic residents’ purchases of foreign assets MINUS foreigners’ purchases of domestic assets.

A

Net capital outflow (NCO)

49
Q

NCO = ____ _____ _____

synonym

A

net foreign investment

50
Q

When a Canadian resident buys stock in Telmex, the Mexican phone company, the purchase _____Canadian net capital outflow.

A

raises

51
Q

When a Japanese resident buys a bond issued by the Canadian government, the purchase _______ Canadian net capital outflow.

A

reduces

52
Q

The flow of capital abroad takes two forms:

foreign investment

A

Foreign direct investment

Foreign portfolio investment

53
Q

Define: Domestic residents actively manage the foreign investment, e.g., Tim Hortons opens a fast food outlet in Russia

A

Foreign direct investment

54
Q

Define: Domestic residents purchase foreign stocks or bonds, supplying “loanable funds” to a foreign firm.

A

foreign portfolio investment

55
Q

Foreign direct investment
Foreign portfolio investment

Which of the above involves residents buying assets located in another country, and which increases net capital outflow?

A

Both

56
Q

When NCO > 0 termed:

A

capital outflow

57
Q

When NCO < 0

A

capital inflow

58
Q

Domestic purchases of foreign assets exceed foreign purchases of domestic assets.

NCO >0 or NCO <0

A

capital is flowing out of the country

NCO >0

59
Q

Foreign purchases of domestic assets exceed domestic purchases of foreign assets

NCO >0 or NCO <0

A

capital is flowing into the country

NCO <0

60
Q

Variables that influence NCO

RRPG

A

Real interest rates paid on foreign assets
Real interest rates paid on domestic assets
Perceived risks of holding foreign assets
Govt policies affecting foreign ownership of domestic assets

61
Q

T or F: real interest rate affects foreign investment

A

True

62
Q

T or F: restrictions that affect trade, are never undermined

A

False; always undermined.

63
Q

T or F: every transaction that affects NX also affects NCO by the same amount; but not the other way around.

A

false; same vice versa

64
Q

When a foreigner purchases a good from Canada, Canadian exports and NX ______. NCO ______.
(increases or decreases)

A

increase; the foreigner pays with currency or assets, so the Canadian acquires some foreign assets, causing NCO to rise

65
Q

When a Canadian citizen buys foreign goods, Canadian imports ____, NX _____ (falls or rises)

A

rises; falls
the Canadian buyer pays with Canadian dollars or assets, so the other country acquires Canadian assets, causing Canadian NCO to fall.

66
Q

T or F: Y = C + I + G + NX

A

True ; accounting identity

67
Q

T or F: Y – C – G = I + NX

A

True

68
Q

T or F: S=I+Y

A

False S=I+NCO

69
Q

T or F: Y=I+NX

A

False; S=I+NX

70
Q

When S>I , the excess loanable funds flow abroad in the form of _____________________.

A

positive net capital outflow

71
Q

When Ss invenstent, and NCO ___ 0;

A

financing; <

72
Q

3 types of International Flows of Goods and Capital :

A
  1. Trade Deficit
  2. Balanced Trade
  3. Trade Surplus
73
Q

What type of international flow of goods and capital is this?

Exports < Imports

A

trade deficit

74
Q

What type of international flow of goods and capital is this?

Net capital outflow = 0

A

Balanced Trade

75
Q

What type of international flow of goods and capital is this?

Y= C+ I + G

A

balanced trade

76
Q

What type of international flow of goods and capital is this?

Net exports >0

A

Trade Surplus

77
Q

What type of international flow of goods and capital is this?

Y > C+ I + G

A

trade surplus

78
Q

What type of international flow of goods and capital is this?

saving < investment

A

trade deficit

79
Q

On a graph, if national saving rises above domestic investment, which would occur?

trade surplus
balanced trade
trade deficit

A

trade surplus

80
Q

On a graph, if NCO fall below 0 (NCO < 0) the result is

A

Net capital inflow

81
Q

International transactions are influenced by international _____.

A

prices

82
Q

 The two most important international prices are the ______ _______ rate and the_____ ______ rate.

A

nominal exchange rate; real exchange rate

83
Q

Nominal exchange rate:

A

the rate at which one country’s currency trades for another.

84
Q

The two ways in which Nominal exchange rates can be expressed?

A
  1. in units of foregin currency per one Canadian dollar

2. in units of Canadian dollars per one unit of the foreign currency

85
Q

Appreciation

A

(“strengthening”) an increase in the value of a currency

as measured by the amount of foreign currency it can buy

86
Q

Depreciation

A

(or “weakening”):
a decrease in the value of a currency
as measured by the amount of foreign currency it can buy

87
Q

If the value of the Canadian dollar rises over time, it is Appreciating or depreciating?

A

appreciating

88
Q

Real exchange rate

A

the rate at which goods and services of one country trade for the goods and services of another

89
Q

Formula for real exchange rate?

A

Real exchange rate = e x P / P*

RER = nominal exchange rate (foreign/domestic cur) x domestic price / forign price (in foreign currency)

90
Q

A Big Mac costs $2.50 but 400 yen in Japan
e=120 yen per $

Compute the real exchange rate:

A

0.75 Japanese Big Macs per CDA Big Mac

91
Q

a real exchange rate of Big macs of 0.75 :

T or F; a Japanese citizen literally exchanges Japanese burgers for Canadian ones.

A

False; This does not mean a Japanese citizen literally exchanges Japanese burgers for Canadian ones

Correct: To buy a Big Mac in Canada,
a Japanese citizen must sacrifice an amount that could purchase 0.75 Big Macs in Japan.

92
Q

T or F: Big Mac is the same everywhere in the world and makes it easy to determine real exchange rate T or F:

A

true

93
Q

Define: the notion that a good should sell for the same price in all markets

A

Law of one price

94
Q

arbitrage

A

making a quick profit by buying coffee in some place and selling in a place of more worth.

95
Q

T or F: Example: Arbitrage drives up the price in placeA and drives down the price in placeB, until the two prices are equal.

A

True

96
Q

Purchasing Power Parity (PPP)

A

a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries

97
Q

T or F: Purchasing-Power Parity (PPP) is based on the law of one price

A

True

98
Q

T or F: PPP implies that the nominal exchange rate between two countries should equal the ratio of price levels.

A

True

99
Q

If inflation is higher in Mexico than in Canada., then P* _____ faster than P, so e ______ –
the dollar _________ against the peso.

A

rises; rises; appreciates

100
Q

If inflation is higher in the Canada than in Japan, then P _____ faster than P*, so e _____ –
the dollar _______ against the yen.

A

rises; falls; depreciates

101
Q

Limitations of PPP Theory

Two reasons why exchange rates do not always adjust to equalize prices across countries:

A

Many goods cannot easily be traded

Foreign domestic goods not perfect substitutes

102
Q

During the German Hyperinflation: what happened to money supply? and what happend to the exchange rate?

A

money supply rose; exchange rate fell

103
Q
  1. Which of the following statements about a country with a trade deficit is not true?
    A. Exports < imports
    B. Net capital outflow < 0 C. Investment < saving D. Y < C + I + G
A

C

A trade deficit means NX < 0. Since NX = S – I,
a trade deficit implies I > S.

104
Q

A Ford Escape SUV sells for $24,000 in Canada and 720,000 rubles in Russia.
If purchasing-power parity holds, what is the
nominal exchange rate (rubles per dollar)?

A

e = P*/P = 720000/24000 = 30 rubles per dollar

105
Q

Canada is an economy with perfect capital mobility because (2 reasons)

A
  1. Canadians have full access to world financial markets

2. the rest of the world has full access to the Canadian financial market

106
Q

T or F:canada’s perfect capital mobility doesn’t mean that the real interest rate in Canada should equal the real interest rate prevailing in
the world: r = rw

A

False ; *it does mean

107
Q

interest rate parity

A

The theory that the real interest rate in Canada should equal that in the rest of the world is known as interest rate parity

108
Q

Real interest rate in Canada is not always equal to the real interest rate in the rest of the world for two reasons:

A

Financial assets carry with them the possibility of default

Financial assets offered for sale in different

109
Q

T or F: Net exports equal exports minus imports.

A

True

110
Q

T or F: Net capital outflow equals domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets.

A

True

111
Q

T or F: Not every international transaction involves the exchange of an asset for a good or service, so net exports equal net capital outflow.

A

False; Every international transaction involves the exchange of an asset for a good or service, so net exports equal net capital outflow.

112
Q

T or F: saving equals domestic investment plus net capital outflow.

A

True

113
Q

Saving can be used to finance domestic _______ or to buy ________ abroad.

A

investment; assets

114
Q

The ________ exchange rate is the relative price of the currency of two countries.

A

nominal

115
Q

The _________ exchange rate is the relative price of the goods and services of the two countries.

A

real

116
Q

T or F: According to the theory of purchasing-power parity, a unit of any country’s currency should be able to buy a different quantity of goods in different countries.

A

false; According to the theory of purchasing-power parity, a unit of any country’s currency should be able to buy the same quantity of goods in all countries.

117
Q

T or F: Theory of PPP implies that the nominal exchange rate between two countries should equal the ratio of the price levels in the two countries.

A

True

118
Q

T or F: Theory of PPP also implies that countries with high inflation should have depreciating currencies.

A

true

119
Q

With perfect capital mobility for small open economy is that the nominal exchange rate in Canada should equal the Net Capital outflow prevailing in world financial markets.

A

False; With perfect capital mobility for small open economy is that the real exchange rate in Canada should equal the real interest rate prevailing in world financial markets.

Econ 114 (6 decks)

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