Open Economy Macroeconomics (Block 3) Flashcards
Final (Chapter 18)
Net Exports Calculation
Net exports (NX) = Exports - Imports.
Identifying exports and imports from descriptions
Exports are goods and services produced domestically and sold abroad, while imports are goods and services produced abroad and purchased domestically.
Nominal exchange rate
The price of one currency in terms of another currency
Real exchange rate
The nominal exchange rate adjusted for differences in price levels between countries.
Appreciation vs depreciation and implications
Appreciation refers to an increase in the value of a currency relative to another, making imports cheaper and exports more expensive, while depreciation has the opposite effect.
Foreign direct investment (FDI)
Investment in which a company or individual in one country owns or controls a significant portion of a business in another country.
Foreign portfolio investment (FPI)
Investment in which individuals or institutions purchase securities issued in another country.
Net capital outflow (NCO)
Net capital outflow measures the imbalance between domestic saving and domestic investment, equal to domestic investment minus domestic saving.
How real interest rate affects components of NCO and overall NCO
Higher real interest rates attract more foreign investment (increasing NCO) and reduce domestic investment (decreasing NCO).
Relation between NX and NCO
Net exports (NX) equals net capital outflow (NCO) in an open economy due to the flow of funds between countries.
Purchasing Power Parity
Purchasing power parity (PPP) is the theory that exchange rates adjust to equalize the purchasing power of different currencies, ensuring that the same basket of goods costs the same in different countries.
Implications for real exchange rate
PPP suggests that changes in relative price levels between countries will affect the real exchange rate.
