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Econ Exam 3 > Chapter 18 > Flashcards

Chapter 18 Flashcards

1
Q

In an open economy

A 
S = I + NCO
Saving = Domestic investment + Net capital outflow
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2
Q

Closed economy

A

Economy that does not interact with other economies in the world

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3
Q

Open economy

A

Economy that interacts freely with other economies around the world

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4
Q

Exports

A

Goods and services that are produced domestically and sold abroad

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5
Q

Imports

A

Goods and services that are produced abroad and sold domestically

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6
Q

Net exports(Trade balance)

A

Value of a nation’s exports minus the value of its imports

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7
Q

Trade surplus (Positive net exports)

A

Exports are greater than imports

The country sells more goods and services abroad than it buys from other countries

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8
Q

Trade deficit (Negative net exports)

A

Imports are greater than exports

The country sells fewer goods and services abroad than it buys from other countries

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9
Q

Factors that might influence a country’s exports, imports, and net exports:

A
  1. Tastes of consumers for domestic &foreign goods
  2. Prices of goods at home and abroad
  3. Exchange rates at which people can use domestic currency to buy foreign currencies
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10
Q

Higher income/economic growth in a foreign country

A

increases exports, net exports increases

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11
Q

Higher income/economic growth domestically

A

increases imports, net exports decreases

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12
Q

Variables that influence net capital outflow

A

Real interest rates paid on foreign assets
Real interest rates paid on domestic assets
Perceived economic and political risks of holding assets abroad
Government policies that affect foreign ownership of domestic assets

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13
Q

Net capital outflow

A

Purchase of foreign assets by domestic residents

=Domestic Investment Abroad − Foreign Investment

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14
Q

Higher interest rate paid on foreign assets increases purchases of foreign assets by domestic consumers

A

Net capital outflow increases

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15
Q

Higher interest rate paid on domestic assets increases purchases of domestic assets by foreign consumers.

A

Net capital outflow decreases

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16
Q

Higher risk of holding assets in a foreign country reduces purchases of foreign assets by domestic consumers

A

Net capital outflow decreases

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17
Q

Higher risk of holding assets in a domestic country reduces purchases of domestic assets by foreign consumers

A

net capital outflow increases

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18
Q

NCO

A

=NX

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19
Q

When NX > 0 (trade surplus)

A

Selling more goods and services to foreigners

Capital is flowing out of the country: NCO > 0

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20
Q

When NX < 0 (trade deficit)

A

Buying more goods and services from foreigners

Capital is flowing into the country: NCO < 0

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21
Q

Savings

A

=Domestic Investment+ Net capital outflow

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22
Q

Trade surplus: Exports > Imports

A

Net exports > 0
Y > Domestic spending (C+I+G)
S > I
NCO > 0

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23
Q

Trade deficit: Exports < Import

A

Net exports < 0
Y < Domestic spending (C+I+G)
S < I
NCO < 0

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24
Q

Balanced trade : Exports = Imports

A

Net exports = 0
Y = Domestic spending (C+I+G)
S = I
NCO = 0

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25
Q

Nominal exchange rate

A

Rate at which a person can trade currency of one country for currency of another
Example

26
Q

Appreciation

A

Increase in the value of a currency as measured by the amount of foreign currency it can buy
Buy more foreign currency

27
Q

Depreciation

A

Decrease in the value of a currency
As measured by the amount of foreign currency it can buy
Buy less foreign currency

28
Q

Real exchange rate

A

Rate at which a person can trade goods and services of one county

        Foreign Price
29
Q

Real exchange rate

A

(e ˣ P) / P*
e: nominal exchange rate between the U.S. dollar and foreign currencies
P: price index for U.S. basket
P*: price index for foreign basket

30
Q

Depreciation (fall) in the U.S. real exchange rate

A

1.U.S. goods: cheaper relative to foreign goods
2.Consumers at home and abroad buy more U.S. goods and fewer goods from other countries
A)Higher exports, Lower imports
B)Higher net exports

31
Q

An appreciation (rise) in the U.S. real exchange rate

A

1.U.S. goods - more expensive compared to foreign goods
2.Consumers at home and abroad - buy fewer U.S. goods and more goods from other countries
A)Lower exports, Higher imports
B)Lower net exports

32
Q

Arbitrage

A

Take advantage of price differences for the same item in different markets
Result: the law of one price

33
Q

Purchasing-power parity, PPP

A

Parity: Equality

Purchasing-power: Value of money in terms of quantity of goods it can buy

34
Q

Theory of purchasing-power parity

A

Nominal exchange rate between the currencies of two countries
Must reflect the price levels in those countries

35
Q

When NCO > 0, net outflow of capital

A

Net purchase of capital overseas

Adds to the demand for domestically generated loanable funds

36
Q

When NCO < 0, net inflow of capital

A

Capital resources coming from abroad

Reduce the demand for domestically generated loanable funds

37
Q

Higher real interest rate

A

Encourages people to save: increases quantity of loanable funds supplied
Discourages investment: decreases quantity of loanable funds demanded
Discourages Americans from buying foreign assets: reduces U.S. net capital outflow
Encourages foreigners to buy U.S. assets: reduces U.S. net capital outflow

38
Q

The market for foreign-currency exchange

A

Identity: NCO = NX

Net capital outflow = Net exports

39
Q

If trade surplus, NX > 0

A

Exports > Imports
Net sale of goods ad services abroad
Americans use the foreign currency to buy foreign assets
Capital is flowing abroad, NCO > 0

40
Q

If trade deficit, NX < 0

A

Imports > Exports
Some of this spending is financed by selling American assets abroad
Foreign capital is flowing into U.S.
NCO < 0

41
Q

A higher real exchange rate

A

Makes U.S. goods more expensive

Reduces the quantity of dollars demanded to buy those goods

42
Q

Equilibrium real exchange rate

A

Demand for dollars
By foreigners
Arising from U.S. net exports of goods and services

43
Q

Market for loanable funds: S =

A

I + NCO

44
Q

Net-capital-outflow curve

A

Link between
Market for loanable funds
Market for foreign-currency exchange

45
Q

Market for loanable funds

A

Supply: national saving
Demand: domestic investment and net capital outflow
Equilibrium real interest rate, r

46
Q

Net capital outflow

A

Slopes downward

Equilibrium interest rate, r

47
Q

Market for foreign-currency exchange

A

Supply: net capital outflow
Demand: net exports
Equilibrium real exchange rate, E

48
Q

Equilibrium real interest rate, r

A

Price of goods and services in the present

Relative to goods and services in the future

49
Q

Equilibrium real exchange rate, E

A

Price of domestic goods and services

Relative to foreign goods and services

50
Q

E and r adjust simultaneously

A

To balance supply and demand
In both markets
Loanable funds
Foreign-currency exchange

51
Q

Government budget deficits

A 
When government spending exceeds government revenue
Negative public saving
Reduces national saving
Reduces supply of loanable funds
Increase in interest rate
Reduces net capital outflow
Crowd-out domestic investment
Decrease in supply of foreign-currency exchange
Currency appreciates
Net exports fall
Push the trade balance toward deficit
52
Q

Tariff:

A

tax on imports

53
Q

Import quota

A

limit on quantity of imports

54
Q

import quota impact

A 
Decrease imports
Increase in net exports
Increase in demand for dollars in the market for foreign-currency exchange
Real exchange rate appreciates
Discourage exports
No change in real interest rate
No change in net capital outflow
No change in net exports
Decrease in imports
Decrease in exports
55
Q

Trade policies affect specific

A

Firms
Industries
Countries

56
Q

Political instability

A

Leads to capital flight

57
Q

Capital flight

A

Large and sudden reduction in the demand for assets located in a country

58
Q

Interest rate in Mexico – increases

A

Reduce domestic investment
Slows capital accumulations
Slows economic growth

59
Q

The peso depreciates

A

Exports – cheaper
Imports – more expensive
Trade balance moves toward surplus

60
Q

Mexico - capital flight affects both markets

U.S. market

A

Fall in U.S. net capital outflow
The dollar appreciates in value
U.S. interest rates fall
Relatively small impact on the U.S. economy
Because the economy of the United States is so large compared to that of Mexico

Econ Exam 3 (6 decks)

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