MACRO L6 - Open Economy

Question 1

what is an open economy

Answer 1

• one which trades with and has financial dealings with other countries
• all countries are open economies, to varying extents

Question 2

what is the balance of payments account

Answer 2

records all payments to and receipts from foreign countries for a specific time period, typically a year or a quarter

Question 3

the BOP account consists of what 3 main parts

Answer 3

1. the current account
2. the capital account
3. the financial account

Question 4

what is the current account

Answer 4

• The record of a country’s imports and exports of goods and services, plus incomes and transfers of money to and from abroad

Question 5

what is the current account balance

Answer 5

the overall balance of trade in goods/services, net income flows and net current transfers

Question 6

what is the capital account

Answer 6

the record of the transfers of capital to and from abroad

Question 7

what does the capital account record

Answer 7

Inflows (credits) and outflows (debit) of funds associated with:
- transfer of funds by migrants
- payment of grants by the gov for overseas projects
- receipt of money for capital projects

Question 8

what is the financial account

Answer 8

The record of the flows of money into and out of the country for the purposes of investment or as deposits in banks and other financial institutions

Question 9

what is direct investment

Answer 9

significant and long-term interest in a business in another country
* Credit: foreign company invests from abroad to UK
* Debit: investment abroad by UK company

Question 10

what is portfolio investment

Answer 10

transactions in debt and equity securities which do not result in the investor having any significant influence on the operations of a business

Question 11

define exchange rate

Answer 11

the rate at which one currency trades for another on the foreign exchange market

Question 12

what is a floating exchange rate

Answer 12

the exchange rate determined by demand and supply

Question 13

define depreciation and appreciation

Answer 13

• Depreciation: fall in the free-market exchange rate (for example, £ buys less $)
• Appreciation: rise in the free-market exchange rate (for example, £ buys more $)

Question 14

what is the exchange rate index

Answer 14

A weighted average exchange rate expressed as an index, where the value of the index is 100 in a given base year

Question 15

define arbitrage

Answer 15

making a profit by buying an asset in a market where it has a lower price and selling it in another market where it has a higher price