Open Markets Flashcards
Openness in goods markets means…
- Lack of free trade restrictions including tariffs and quotas
- Low transport costs
Openness in financial markets means…
Lack of capital controls which place restrictions on the ownership of foreign assets
Openness in factor markets means…
The ability of firms to choose where to locate production, and workers to choose where to work
What is the real exchange rate?
The price of domestic goods relative to foreign goods
What affects the nominal exchange rate (E) in the S.R.?
S&D in the currency markets and it moves in the same direction an i
Real exchange rate =
EP/Pw
What affects the real exchange rate in the short run?
Due to sticky inflation moves with unanticipated changes in E
What is the law of one price?
Says that goods must sell for the same price in all countries in the long run due to arbitrage price convergence
What can cause the law of one price to not hold?
Differences in taxes, tariffs and transport costs
Nominal exchange rate with law of one price =
E = Pw/P
What is the real exchange rate in the Long run?
EP/Pw = 1, If the law of one price holds, then foreign goods and domestic goods should sell for the same price, so that the real exchange rate should equal 1
What is the nominal exchange rate in the long run?
Determined by the amount of money in one country relative to another as the quantity theory tells us that one of the key determinants of the price level is the money supply
Reasons for intratemporal trade:
Differences in preferences/productivity
Reasons for intertemporal trade:
Differences in patience, investment opportunities (ideas against cash)
Reasons for pure asset trade:
Differences in risk aversion, expectations about future