Int. Flows of Goods and Capital, Real and Nominal Exchange Rates, Open-Economy Macroeconomics Flashcards
refers to the difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners
the net capital outflow (sometimes called net foreign investment)
The flow of capital between the Philippine economy and the rest of the world takes two forms:
- foreign direct investment
- foreign portfolio investment
If there is more demand for PH goods and services than there is demand for foreign goods and service, the PH economy is running a _____.
trade surplus
If the PH economy is spending more on foreign goods and services than they are earning from selling PH goods and services abroad, it is running a _____.
trade deficit
the price of one currency in terms of another currency
foreign exchange rate
the rate at which a person can trade the currency of one country for the currency of another
the nominal exchange rate
the rate at which a person can trade the goods and services of one country for the goods and services of another; expressed as units of a good rather than a currency
real exchange rate
if the real exchange rate is high, ____ are relatively cheap and _____ are relatively expensive
PH goods; American goods
if the real exchange rate is low, _____ are relatively expensive and _____ are relatively cheap
PH goods; American goods
This model states that a unit of any given currency should be able to buy the same quantity of goods in all countries.
purchasing power parity
This law asserts that a good must sell for the same price in all locations. Otherwise, there would be opportunities for profit left unexploited.
The law of one price
The process of taking
advantage of price differences for the same item in different markets
is called
arbitrage
What does the theory of purchasing-power parity say about exchange rates?
It tells us that the nominal exchange rate between
the currencies of two countries depends on the price levels in those
countries.
Two reasons why Purchasing Power Parity (PPP) does not always hold:
- Many goods are not easily traded. (E.g., haircuts)
- Even tradable goods are not always perfect substitutes when they are
produced in different countries.
An increase in the real
exchange rate (RER)
makes PH goods ______ to Americans.
less expensive
