Term 1 Lecture 4: Openness in Goods and Financial Markets

Question 1

What are the 3 types of openness in markets (3)

Answer 1

-Openness in the goods market: ability to choose between domestic and imported G/S
-Openness in financial markets: ability to choose between domestic/foreign assets
-Openness in factor arkets: ability of firms to choose where to locate, and labour to choose where to work

Question 2

What is the main factors between differences in export ratios, and why can exports be larger than GDP (1,1)

Answer 2

-The main factors between differences in export ratios are grography, as the smaller the country, the more it must specialise then rely on imports
-Exports can be larger than GDP, since exports and imports may include intermediate goods

Question 3

What is the real exchange rate (2)

Answer 3

-The real exchange rate is the price of British goods in terms of European goods
-ε = EP/P*
(ε = real ER, E = nominal ER, P = price of dom goods in dom currency, P* = price of foreign goods in foreign currency)

Question 4

What is the balance of payments, current account and capital account (3, 1)

Answer 4

-The balance of payments are a set of accounts that summarise a countrys transactions with the rest of the world
-The current account is mainly composed of the trade balance (payments to and from the rest of the world)
-The capital account is mainly composed of transactions in financial assets (net foreign holdings of domestic assets

-The current account balance and the capital account balance should be equal, but because of data gathering errors they aren’t (time discrepancies, export the good but import the payment, leading to statistical discrepancies)

Question 5

What are the components of the current account (5)

Answer 5

-Exports +
-Imports -
-Income recieved +
-Income paid -
-Net transfers recieved (aid) +-

-CA = sum of them all

Question 6

What are the components of the capital account (2,1,1)

Answer 6

-Increase in foreign holdings of domestic assets +
-Increase in domestic holdings of foreign assets -

-Capital account balance = sum of them all

-Statistical discrepancy = difference between capital and current account (one should be negative, one positive, so its the absolute difference between the 2)

Question 7

What is GNP

Answer 7

-GNP = GDP + NI, where NI denotes net income payments recieved from the rest of the world - income paid to the rest of the world