International Macro Flashcards
What are some benefits of international trade?
- Exposed to goods and services not available in their own country
- Resources used more efficiently
- Global economy promoting foreign direct investment (invest into other countries companies)
What is the idea of comparative advantage?
• Produce at a lower opportunity cost then competitors (skipper and Gilligan)
How do exports and imports affect the economy?
- Exports increase demand
- Imports reduce demand
- Imports exceed exports
- Weaker dollar increases exports and agg demand
What does an open economy have on the effectiveness of monetary policy? Of fiscal policy?
• Monetary Policy
o Strengthened and more powerful
o MS up, i (interest rates) down, $ down, X (exports) up, and add D up
o Increases investment demand and increases export demand
• Fiscal Policy
o Weakened and less powerful
o Raise interest rates
o Foreigners want more money in US bank to earn higher interest
o G up, I up, $ up, agg D down
What are the determinants of the exchange rates in the short-run? In the long-run?
• Short-run
o Supply and demand for currency
o Demand on money (yen) depends on demand for goods (Japanese goods and services or real and financial assets)
• Long-run
o Purchasing power parity
o Exchange rates adjust in LR to equalize prices
What is purchasing power parity theory?
• Law of one price
(traded commodities sell for same price all over)
o If not buy where cheap
• PPP
(exchange rates in the long run adjust to equalize price of (traded) goods)
o Ex. Donut $1 US €1 fance
• Inflation up in A- currency depreciates
• Productivity up in A- currency appreciates
Why do we have a current account deficit, and what does it imply?
• Current account deficit
(roughly imports exceed exports)
o Reduces agg D
o $ depreciation (a decrease in an asset’s value caused by unfavorable market conditions)
• Leads to borrowing, financial account surplus
o Sums up to 0
Why do we have a capital/financial account surplus and what does it imply?
• Financial account deficit
(financial account measure net financial inflows)
o Foreigners are buying more of our real (factories) and financial (stocks, bonds) then we are buying of theirs
o Growing poorer or in debt to them
• Current account deficit and financial account surplus sum up to )
o Receiving exports and not buying from them [kind of]
What is the ‘twin deficit problem’? The ‘tri-lemma’?
• Twin deficit
o Government Budget deficit leads to current account deficit
• Tri-lemma
o (can only choose two)
• Fixed exchange rates (reduces uncertainty in international trade)
• Capital mobility (allows funds to freely flow in and out of a country to control inflation)
• Discretionary monetary policy control (control the money supply to control inflation)
o If fix rates have capital mobility, must use monetary policy to control interest rates to manage demand for currency
What are the advantages of floating exchange rates? Fixed exchange rates?
• Floating (flexible) exchange rates
(automatic adjustments)
o Difficult for international business
o Balances supply and demand for currency
o Short-run
• Fixed exchange rates
o Do not automatically balance supply and demand for currency
o Do not correct account deficits/surpluses
o Eases international business trade
How does a strong currency affect the domestic market?
Look Up
Why does China’s fixed exchange rate system present dangers to China?
• Lose control of domestic MS with fixed rates and capital mobility • If over-valued then to high o Exports to low Imports to high o Devaluation • If under-valued then to low o Exports up, Imports down • Gov buys/ sells Yuan to maintain
