Openness in Goods and Financial Markets Flashcards
Explain openness in goods markets
- Ability of consumers and firms to choose between domestic goods and foreign goods.
- Even countries most committed to free trade have tariffs and quotas.
What are tariffs?
Taxes on imported goods
What are quotas?
Restrictions on the quantity of goods that can be imported
Openness in financial markets
- Ability of financial investors to choose between domestic assets and foreign assets
- Until recently some rich countries had capital controls
Describe openness in factor markets
- Ability of firms to choose where to locate production, and of workers to choose where to work
True of False:
The volume of trade is a good measure of openness
False - tradable goods are goods that compete with foreign goods in either domestic markets or foreign markets
True or False:
Exports are capable of exceeding GDP
False - it is not possible
What is the real exchange rate?
The price of domestic goods relative to foreign goods
Define nominal exchange rate
The price of the domestic currency in terms of foreign currency
Define (nominal) appreciation
Increase in the price of the domestic currency in terms of a foreign currency (i.e.: increase in exchange rate)
What is (nominal) depreciation?
Decrease in the price of the domestic currency in terms of a foreign currency (i.e.: decrease in the exchange rate)
Name 5 policies of international trade
1.) Tariffs
2.) Quotas
3.) Exchange rate - value of the price of the currency against another
4.) Import substitution - transition where previously imported goods are now produced in a country
5.) Subsidy - a means of production promotion whereby companies are encouraged to produce more by having government pay for parts of their factors of production
Name the three types of exchange rate policies
1.) Fixed
2) Managed
3.) Free-floating
What is the foreign exchange market?
- Different currencies are sold
- Buying currency of interest before entering its territories
Why are exports regarded as important for currencies?
They aid with strengthening the currency
What are the balance of payments?
A set of accounts that summarise a country’s transactions wit the rest of the world
What is a current account?
Transactions ABOVE THE LINE record payments to and from the rest of the world
Why would countries want to have a positive balance of payment/surplus?
- Exports are greater than imports which contributes towards boosting your net balance
- If exporting less, it’s a loss and causes a deficit
List the 3 factors which may cause
1.) Exports - when selling, people must go through foreign exchange market
2.) Tourism - people coming to the country to spend their money
3.) Markets - stock markets/securities/shares
What is a financial account?
Transactions BELOW THE LINE record net foreign holdings of domestic assets (e.g.: are people investing in South Africa or are they investing in other countries
What is a GNP?
Gross National Product - measures the value added by domestic factors of production
List the 3 types of floating exchange rates
1.) Free floating - exchange rate is determined by demand and supply (i.e.: Dollar appreciation/Rand Depreciation vice versa)
2.) Managed floating - when government deliberately intervenes to se the exchange rate
3.) Fixed floating - government of country A agrees with government of country B to fix exchange rate to be exactly what it is IF they can talk to other countries that their currencies should be equal to their Rand.
What is direct quotation?
Quoting the exchange rate in your own currency
e.g.: 1 dollar to a rand = R20
What is indirect quotation?
$1/20 = $0,05 - quoting using a foreign currency
