Economics Flashcards
Covered Interest Rate Parity
Enforced by arbitrage
Uncovered Interest Rate Parity
Expected change in spot rate over time horizon is reflected in the interest rate differential
Forward Rate Parity
Forward exchange rates are an unbiased predictor of future spot exchange rates
Assumes Covered and Uncovered interest rate parity holds
Law of One Price
Identical Goods should trade for the same price across countries when valued with a common currency
Absolute Version of Purchasing Power Parity
Equilibrium exchange rates are entirely determined by the ratio of the national price levels
Relative Version of Purchasing Power Parity
Percentage change in spot rate is determined entirely by the inflation differential of the domestic and foreign countries
ex ante version of Purchasing Power Parity
Inflation expectations are responsible entirely for the change in future spot rates
Real Interest Rate Parity
The proposition that real interest rates will converge to the same level across different markets
International Fisher Effect
The foreign-domestic nominal yield spread is determined entirely by the expected inflation differential between the two countries
The Flow Supply/Demand Channel
The theory that purchases and sales in international goods & services require exchange of domestic and forein currencies to settle transactions ie. Country that sells more than buys has more demand for their currency and their currency appreciates
Long Lag for goods to reprice to different exchange rates
Portfolio Balance Channel
Country that sells more goods than it buys will own too much of the other countrie’s currency; they might want to sell to balance their portolfio, pushing down exchange rates for the foreign currency
Mundell Fleming Model w/ High Capital Mobility
Mundell Fleming Model w/ Low Capital Mobility
Portfolio Balance Approach
Countries that run large budget deficits for an extended period of time could see their currency depreciate in the long run
Production Function
Total Factor Productivity (TFP)
General level of productivity or technology in an economy
Denoted by A in production function; multiplicative to growth
Cobb-Douglas Production Function
Cobb Douglas Production Function in Output per Laborer Terms
Growth Accounting Equation
(Solow)
Labor Productivity Growth Accounting Equation
Captial Deepening
An increase in the Captial to Labor ratio
Dutch Disease
Currency Appreciation driven by strong export demand make other sectors of the economy, particularly manaufacturing, less competetive globally
Labor Force Participation Rate
Percentage of the working age population in the labor force
Classical Model
Increase in productivity increases population growth, because of marginal returns to labor, population growth outpaces per capta income.
The relationship between productivity and population growth broke down.
Growth Rate of Output per Worker
Sustainable Growth Rate of Output
Equillibrium Output to Capital Ratio
Production Function in Endogenous Growth Theory
Absolute Convergence
Developing Countries, regardless of their starting point, will eventually catch up to developed countries and match them in per capita output.
Convergence of growth rate, not total level
Neoclassical Growth Implication
Conditional Convergence
If countries have same savings rate, population growth & production function, countries will converge to both the same growth rate and level of growth over time
Neoclassical Growth Implication
Club Convergence
Only Rich and Middle income countries will converge, poor countries will not unless they make institutional changes
Informational Frictions
Market inefficienies that lead to sub optimal market outcomes
Statutes
Laws enacted by legislative bodies
Administrative Regulations or Administrative Law
Rules issued by government agencies or other regulators
Judicial Law
Interpretations of the Courts
Independent Regulators
Non government agencies but are given their authorities by governments
More immune from political pressure
Self Regulatory Bodies
Private organizations that are given their power by their members
Self Regulating Organizations (SRO’s)
Are given their recognition & authority, including enforcement power, by government agencies
Substantive Law
Focuses on the rights and responsibilities of entities
Procedural Law
Focuses on the protection and enforcement of substantive laws
Regulatory Capture
Regulation that works for the enhancement and benefit of the regulated
Regulatory Competition
Regulators compete to provide a regulatory lanscape to attract certain entities
Regulatory Arbitrage
Identification and exploitation of certain regulations in their interpretation or economic substance for the benefit of a company
Regulatory Burden
Cost of regulation for the regulated
Net Regulatory Burden
Private costs of regulation minus the private benefit of regulation
