Chapter 17 Flashcards
2 things analyzed with international trade
flow of goods and capital in and out of the country
Definition of ‘balance of trade’
Concept that measures the flow of the value of goods and is calculated as:
balance of trade = exports - imports
What is a trade deficit?
What is a trade surplus?
A trade deficit is a negative balance of trade
A trade surplus is a positive balance of trade
Definition of FDI
Foreign Direct Investment refers to when a firm runs part of its operation abroad or invests in another company abroad
What is a Foreign portfolio investment?
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)
What is Net Capital Outflow?
This refers to the net flow of funds invested outside of a country .
How can a country sustain large deficits?
By having a large capital outflow
What is the balance of payments identity and what does it show? How does it show this?
An equation that shows that the value of net exports equals the net capital outflow
NX = NCO
True or false the supply of loanable funds is the difference off national savings
False: the supply of loanable funds is the Sum of national savings
What is the relationship between savings and the interest rate?
As the interest rate increases, savers are going to supply a greater quantity of loanable funds to the market (basically people saving more)
What are national savings comprised of?
Public and private savings
What happens if Canadian workers get alot of confidence?
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
What happens if a country increases its budget deficit (so imports more; ie) spends more than exports)
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
What is the exchange rate?
The value of one currency expressed in terms of another currency.
What is exchange rate appreciation?
What is exchange rate depreciation
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
Example of exchange rate appreciation
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
What is exchange rate depreciation?
A decrease in the value of a currency relative other currencies
Example of exchange rate depreciation
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
Relationship between exchange rate and deficit
When the exchange rate falls, the trade deficit decreases
What determines the level of net exports?
The equilibrium exchange rate
Benefits to multiple countries using the same currency
tourists do not have to go through the hassle of exchanging money
neighbouring trade countries don’t have to worry about exchange rate fluctuations
Exchange rates can be categorized by whether they are…. ______ or ______
floating exchange rate - determined by the market
or
fixed exchange rate is set by the government and this causes either a shortage or surplus.
Why would a gov’t decide to fix its exchange rate?
allows for more predictability and stability
This means the government must intervene and either buy or sell foreign currency.
Speculative attack
when speculators sell currency when it has a high value and buy it when it has cheapened…
What does the government do after suffering from a speculative attack?
the supply of currency shifts to the right; the government must buy its own currency using foreign reserves to maintain the fixed exchange rate.
What is the nominal exchange rate? and how does it differ from real exchange rate?
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
formula for real exchange rate
nominal exchange rate x (domestical price level / foreign price level)
Two kinds of financial crises
Debt Crises and exchange rate crises
What institution is responsible for keeping the global financial system together?
the International Monetary Fund - steps in to lend countries money
Debt crises in Argentina
this is when countries default on loans
investors pulled out of argentina and their interest rates got higher; this reduces public savings
exchange rate crises
loss in confidence in a gov’t ability to defend an exchange rate;
