Chapter 17

Question 1

2 things analyzed with international trade

Answer 1

flow of goods and capital in and out of the country

Question 2

Definition of ‘balance of trade’

Answer 2

Concept that measures the flow of the value of goods and is calculated as:

balance of trade = exports - imports

Question 3

What is a trade deficit?

What is a trade surplus?

Answer 3

A trade deficit is a negative balance of trade

A trade surplus is a positive balance of trade

Question 4

Definition of FDI

Answer 4

Foreign Direct Investment refers to when a firm runs part of its operation abroad or invests in another company abroad

Question 5

What is a Foreign portfolio investment?

Answer 5

Investment funded by foreign sources that is operated domestically

This increases GDP of both countries (host gets more resources, investing country gets ways to earn higher returns, global economy is more efficient)

Question 6

What is Net Capital Outflow?

Answer 6

This refers to the net flow of funds invested outside of a country .

Question 7

How can a country sustain large deficits?

Answer 7

By having a large capital outflow

Question 8

What is the balance of payments identity and what does it show? How does it show this?

Answer 8

An equation that shows that the value of net exports equals the net capital outflow

NX = NCO

Question 9

True or false the supply of loanable funds is the difference off national savings

Answer 9

False: the supply of loanable funds is the Sum of national savings

Question 10

What is the relationship between savings and the interest rate?

Answer 10

As the interest rate increases, savers are going to supply a greater quantity of loanable funds to the market (basically people saving more)

Question 11

What are national savings comprised of?

Answer 11

Public and private savings

Question 12

What happens if Canadian workers get alot of confidence?

Answer 12

NCO decreases because we’re not investing abroad, more inward; however foreigners want to invest in Canada.

The demand curve (I + NCO) shifts left
Interest drops, lower quantity of loanable funds. It is shifting down on the savings curve

Question 13

What happens if a country increases its budget deficit (so imports more; ie) spends more than exports)

Answer 13

Well it has to borrow to make up the difference.

As borrowing increases, the supply curve shifts inward along the I +NCO curve.
Interest rate is higher. Lower quantity of loanable funds traded

Question 14

What is the exchange rate?

Answer 14

The value of one currency expressed in terms of another currency.

Question 15

What is exchange rate appreciation?

What is exchange rate depreciation

Answer 15

Appreciation =An increase in the value of a currency relative to the value of another currency.

Depreciation =A decrease in the value of a currency relative other currencies

Question 16

Example of exchange rate appreciation

Answer 16

when canadian currency appreciates, residents can buy more foreign currency and foreigners can buy less Canadian currency.
ie) foreign goods get cheaper, domestic goods get expensive

This drops NCO and NET exports (nx = nco) because foreigners don’t want to buy canadian goods - this correlates with the drop of the exchange rate

Question 17

What is exchange rate depreciation?

Answer 17

A decrease in the value of a currency relative other currencies

Question 18

Example of exchange rate depreciation

Answer 18

when the Canadian currency depreciates, Canadian residents can buy fewer foreign currency and foreigners can buy more canadian currency
ie) foreign goods are more expensive for canadians and canadian goods are cheaper for foreigners

This increases net exports (NCO) because foreigners are buying domestic goods

Question 19

Relationship between exchange rate and deficit

Answer 19

When the exchange rate falls, the trade deficit decreases

Question 20

What determines the level of net exports?

Answer 20

The equilibrium exchange rate

Question 21

Benefits to multiple countries using the same currency

Answer 21

tourists do not have to go through the hassle of exchanging money

neighbouring trade countries don’t have to worry about exchange rate fluctuations

Question 22

Exchange rates can be categorized by whether they are…. ______ or ______

Answer 22

floating exchange rate - determined by the market

or

fixed exchange rate is set by the government and this causes either a shortage or surplus.

Question 23

Why would a gov’t decide to fix its exchange rate?

Answer 23

allows for more predictability and stability

This means the government must intervene and either buy or sell foreign currency.

Question 24

Speculative attack

Answer 24

when speculators sell currency when it has a high value and buy it when it has cheapened…

Question 25

What does the government do after suffering from a speculative attack?

Answer 25

the supply of currency shifts to the right; the government must buy its own currency using foreign reserves to maintain the fixed exchange rate.

Question 26

What is the nominal exchange rate? and how does it differ from real exchange rate?

Answer 26

Stated rate at which one country’s currency can be traded for another country’s currency

Real exchange rate is the value of goods in one country expressed in terms of the same goods in another country (basically seeing how much one CPI costs in another country compared to another)
Another way of saying exchange rate adjusted for purchase power parity

Question 27

formula for real exchange rate

Answer 27

nominal exchange rate x (domestical price level / foreign price level)

Question 28

Two kinds of financial crises

Answer 28

Debt Crises and exchange rate crises

Question 29

What institution is responsible for keeping the global financial system together?

Answer 29

the International Monetary Fund - steps in to lend countries money

Question 30

Debt crises in Argentina

Answer 30

this is when countries default on loans

investors pulled out of argentina and their interest rates got higher; this reduces public savings

Question 31

exchange rate crises

Answer 31

loss in confidence in a gov’t ability to defend an exchange rate;