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OSB > Lecture 9 > Flashcards

Lecture 9 Flashcards

1
Q

What is the equation for private savings?

A

Y - T - C

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2
Q

What are private savings?

A

The amount of income that households have left of their income after paying their taxes and for their consumption

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3
Q

What is the equation for public savings?

A

T - G

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4
Q

What are public sayings?

A

The amount of tax revenue that the government has left after paying for its spending. The government receives T in tax revenue (minus transfers) and spends G on goods and services

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5
Q

In the NCO, are outflows positive or negative?

A

positive

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6
Q

In the NCO, are inflows positive or negative?

A

negative

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7
Q

In an open economy, there are two uses for domestic savings. What are they?

A

(i) domestic investment

(ii) the purchase of foreign assets

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8
Q

In an open economy, domestic investment has two sources. What are they?

A

(i) domestic savers (local funds)

ii) foreign funds (funds from offshore

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9
Q

If savings is smaller than investment, what happens?

A

Part of investment if financed from overseas which means that there is a decrease in the NCO and foreigners gain a claim on domestic assets
(there is an addition to the capital account)

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10
Q

If savings is larger than investment, what happens?

A

Part of the savings funds investment overseas which means there is an increase in the NCO, domestic residents gain a claim on foreign assets
(there is a deduction to the capital account)

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11
Q

Although NX is positive for most years after 1985, the large inflow of foreign capital prior to this has meant increasingly negative ______ and ________ ______ ________

A

NFI

current account deficits

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12
Q

International transactions are influenced by what? What does this involve?

A

international prices:

  • nominal exchange rate
  • real exchange rate
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13
Q

Define nominal exchange rate

A

The rate at which a person can trade the currency of one country for the currency of another.

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14
Q

Nominal exchange rate can be defined as the _________ return on ________ and the monetary _____ to _________

A

monetary
savings
cost
borrowing

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15
Q

How can we simplify the definition of the nominal exchange rate?
What does it not tell you?

A

If you take $NZ and swap it, how much do you get in return?

It does not tell you what you can buy with that ie. we don’t know if you can buy the same thing which each currency

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16
Q

What is the real exchange rate? What does it tell you?

A

This is the nominal interest rate corrected for inflation and it can tell you if you can buy more or less with the other currency

17
Q

What are the two different ways to express exchange rates?

A
  • the units of foreign currency per unit of domestic currency, eg. US$0.82 per NZ$1 (we use this)
  • units of domestic currency required to purchase one unit of foreign currency eg. NZ$1.22 is required to buy US$1
18
Q

What is an aprreciation?

A

An increase in the value of a currency as measured by the amount of foreign currency it can buy (ie. it can now buy more of the foreign currency)

19
Q

An appreciation is also called what?

A

a strengthening of the dollar

20
Q

What is a depreciation?

A

A decrease in the value of a currency as measured by the amount of foreign currency it can buy

21
Q

A depreciation is also called what?

A

A weakening of the dollar

22
Q

What is the difference between appreciation/depreciated and revaluing/devaluing?

A

revaluing/devaluing occurs when someone is deciding what the exchange rate should be, rather than an appreciation/depreciated which occurs due to market forces

23
Q

What is one word to describe the weighted index to show our currency and how it is moving with major trading partners?

A

volatile

24
Q

What is the trade weighted index and why is it used?

A

it is a weighted index, weighted depending on how important other countries are for trading

we can use this exchange rate index to create a single measure of the value of a currency

25
Q

Prices of goods and services in different countries depend on what two things?

A
  1. nominal exchange rate

2. local currency prices

26
Q

Define the real exchange rate

A

this is the rate at which a person can trade the goods and services of one country for the goods and services of another country

27
Q

How can we compute real exchange rate?

A

(nominal ER x domestic prices) / (foreign price)

28
Q

How can we calculate the domestic prices or the foreign prices when calculating the real exchange rate?

A

using the CPI

29
Q

What is the effect of a depreciation in the NZ real exchange rate on the net exports?

A

NZ goods become cheaper relative to foreign goods and NZ’s net exports will rise

30
Q

What is the effect of an appreciation in the NZ real exchange rate on the net exports?

A

NZ goods become more expensive relative to foreign goods and NZ’s net exports will fall

31
Q

What does the purchasing power parity theory state?

A

any unit of given currency should be able to buy the same quantity of goods and services in our countries

32
Q

The purchasing power parity is based on the low of one price. What does this mean?

A
  • a good must sell for the same price in all locations

- it assumes away significant trade/arbitrage costs

33
Q

Purchasing power parity says that prices ________ if they can

A

equate

nominal exchange rate moves until prices are the same, if they are tradable

34
Q

If chocolate bars cost $1 at Cumberland’s and $3 at Shop.com, you could make a profit buying chocolate bars at _______ and selling them at _______.
This action on a large scale would increase the ________ at Cumberland’s and so increase the _______ and increase the ________ at Shop.com which _________ the price. If there was a border between them, the currency _______ _______ rate will change to make the prices the ______

A

Cumberland’s
Shop.com

demand
price

supply
decreases

nominal exchange
same

35
Q

The exchange rate should be such that what ever a Big Mac costs in NZ, when it is changed to yen should still be able to buy a Big Mac in Japan. If this is not the case, what happens?
What can this be used for?

A

The exchange rate changes to make them the same

We can use this to see if the exchange rate appreciates or depreciates
ie. the PPP can be used to predict where the ER will change

OSB (26 decks)

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