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Year 1 - Macro > Open Economy > Flashcards

Open Economy Flashcards

1
Q

Define balance of payments?

A

Record of all transactions between the residents of that country and the rest of the world

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2
Q

What is the BofP made up of?

A

Current account and capital and financial accounts

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3
Q

What are inflows?

A

Any transaction that leads to a receipt of payment from foreigners is a CREDIT item (+ sign)

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4
Q

What are outflows?

A

Any transaction that receives receipt of payment to foreigners is a DEBIT item (- sign)

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5
Q

3 main parts of a CA?

A

1) net exports of goods and services (X-M)

2) net income flows - income receipts from abroad minus income payments to foreigners
(Eg. Wages paid to residents working abroad, interest payments on bonds)

3) net current transfers - payments between countries that do not correspond to the purchase of goods, services or assets (eg. foreign aid)

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6
Q

2 parts of capital and financial account (KFA), explained and examples?

A

Capital account: records of capital transfers of non-produced, non financial assets
Eg. Parents, copyrights, franchises

Financial account: records transactions of financial assets
Eg. Shares, bonds, bank deposits

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7
Q

What is FDI?

A

Investments with significant influence on the operations of a firm in a different country

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8
Q

What are brownfield investments and examples?

A

Investments in bonds/stocks by UK/foreign companies in foreign/UK branches

Eg. Mergers, joint ventures

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9
Q

What are greenfield investments and examples?

A

Investing by setting up subsidiaries or associate companies abroad

Eg. Building factories abroad

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10
Q

What is FPI?

A

Foreign portfolio investment: investments in bonds and stocks where the investor has no appreciable say in the operation of the firm

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11
Q

What is meant by ‘other investments’ in the financial account?

A

Short term monetary movements (eg. Deposits, loans)

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12
Q

What are reserves wrt to the financial account?

A

Financial assets held as part of the UK’s reserves assets (eg. Currency, bonds)

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13
Q

Why is CA+KFA=0?

A

Because every international transaction involves a ‘swap’ between countries

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14
Q

Net exports = ?

A

Output - domestic spending(on foreign and domestic goods)

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15
Q

If output > domestic spending?

A

Trade surplus

And vice versa

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16
Q

See open economy diagrams l16 pages 2-5

A

Now

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17
Q

What are X and M?

A

X = value of domestically produced goods that are sold abroad

M = value of foreign produced goods that are sold domestically

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18
Q

Define capital outflow (CO)?

A

Value of foreign financial assets purchased by domestic residents

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19
Q

Define capital inflow(CI)?

A

Value of domestic financial assets purchased by foreigners

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20
Q

See diagrams pages 6+7 L16

A

Now

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21
Q

2 reasons Britain supplies £s?

A

M and CO

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22
Q

2 reasons foreign countries demand £s?

A

X and CI

23
Q

M+CO = ?

A

X+CI

Tf

CO-CI=X-M

Tf NCO = NX

24
Q

What can we deduce if a country runs a trade deficit?

A

It also runs an NCO deficit since NCO=NX

25
Q

See question in notes, summary in notes, and diagram page 9

A

Now

26
Q

Saving?

A

S=I+NCO

27
Q

What does it mean for S and I if NCO is:
A) less than zero
B) greater than zero

A

A) means saving is less than investment tf borrowing from abroad

B) means saving is more than investment tf lending abroad

28
Q

Since NX=NCO?

A

S-I=NX

29
Q

Draw diagram for open economy loanable funds market?

A

Now

30
Q

In an open economy, how does a rise in the UK’s real interest rate relative to abroad affect (Both) economies?

A

Makes UK investments more attractive:

Tf:
- domestic investors buy less foreign financial assets (FALL IN CO)

  • foreign investors buy more UK financial assets (RISE IN CI)
31
Q

What is the relationship between NCO and r?

A

Negative

32
Q

Draw diagram for NCO(r)

A

Now

33
Q

Define exchange rate?

A

The price at which residents of two countries trade with each other

34
Q

Define nominal exchange rate(e)?

A

The relative price of the currencies of the two currencies (rate at which you can trade one currency for another)

35
Q

What do appreciation and depreciation mean for the £ in buying foreign currency X?

A

Appreciation: £ buys more X

Depreciation: £ buys less X

36
Q

Define real exchange rate?

A

The relative price of the goods of two countries (ie. Rate at which we can trade goods between goods countries)

37
Q

How to calculate ratio of foreign:domestic prices?

A

1/ε

38
Q

What determines whether you should buy a good domestically or abroad?

A

The REAL exchange rate

39
Q

What is the relationship between NX and ε?

A

Negative

40
Q

Draw NX(ε) diagram?

A

Now

41
Q

Draw diagram of NCO and NX against ε?

A

Now

42
Q

What is the link between loanable funds market and foreign currency exchange market and why?

A

S=I+NCO
NCO=NX

Tf NCO

43
Q

Show on a diagram and explain how expansionary fiscal policy affects the market for loanable funds, the net capital outflow and therefore the market for foreign exchange?

A

Now

44
Q

Show on a diagram and explain how contractionary fiscal policy affects the market for loanable funds, the net capital outflow and therefore the market for foreign exchange?

A

Now

45
Q

Explain what happens if via trade policy the government prohibits the import of a good using a diagram?

A

Now

46
Q

See pages 11-14 L17

A

Now

47
Q

When does NX(ε)=NCO(r)?

A

In equilibrium

48
Q

Open economy equation when in equilibrium?

A

Y=C+I(r)+G+NCO(r)

49
Q

How to derive LN curve in an open economy?

A

Same as in closed economy

50
Q

Mechanism and diagram for deriving IS curve in open economy?

A

Increase r -> decrease (I(r)+NCO(r)) -> decrease Y

51
Q

Show how the IS-LM diagram in an open economy can show the equilibrium NCO, NX, r, ε?

A

Now

52
Q

Explain the effect of expansionary FP in an open economy on the IS-LM model, and tf the NCO, r, NX and ε?
Do the same for expansionary MP and trade policy(eg. Government restricts imports on foreign cars)?

A

See notes for answers

53
Q

Important thing to remember when doing mechanisms between NCO, NX, r and ε?

A

That change in NCO doesn’t cause change in NX directly, and vice versa; a change in NCO changes the ε and this in turn changes NX. A change in NX changes ε and this in turn changes NCO

Year 1 - Macro (11 decks)

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