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ECON 203 > Topic 11- Open Economy MacroEconomics > Flashcards

Topic 11- Open Economy MacroEconomics Flashcards

1
Q

Closed Economy

A

one that does not interact with other economics

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2
Q

Open Economy

A

one that interacts freely with other economies

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3
Q

How does an open economy interact with other countries (2)

A

1) Trade (Buying and selling goods in world market)
2) Financial Markets (buying and selling capital assets such as stocks and bonds)

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4
Q

Exports and Imports

A

Exports: g/s produced domestically, sold abroad

Imports: g/s produced abroad, brough domestically

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5
Q

Net Exports

A

TARADE BALANCE (EXPORTS-IMPORTS)

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6
Q

Openness in Goods Market

A

The opportunity for consumers and
firms to choose between domestic and foreign goods

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7
Q

Tariffs and Quotas

A

Trade Restrictions

TARIFFS= TAXES

QUOTAS: QUANTITIY RESTRICSTS

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8
Q

Trade Surplus

A

Exports >Imports

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9
Q

Trade Deficit

A

Exports < Imports

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10
Q

Trade Balance

A

Exports=Imports

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11
Q

Oppennes in Finacial Markets

A

The opportunity for financial investors to choose between domestic and foreign financial assets

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12
Q

Restrictions on openness in financial markets

A

Capital Controls

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13
Q

Capital Controls

A

restrictions on the foreign assets domestic residents could hold as well as on the domestic assets foreigners could hold

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14
Q

How is a trade deficit difference financed

A

When you buy more than you sell to the rest of the world, yo must issue bonds or stocks to the rest of the world.

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15
Q

In a closed economy, what is total saving equal to?

A

S=I

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16
Q

In a open eocnomy, what is total saving equal to?

A

S=I+NX

Y=C+G+I+NX
Y-C-G=I+NX
S=I+NX

Investment+Net Exports

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17
Q

If there is a trade surplus ( NX>0), then what

A

S=I+NX
and NX>0
THEN

S>I

Which means that the supply of laonable funds in this economy is high, therefore, the economy will lend money to the rest of the world

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18
Q

If NX<0, or there is a trade deficit, then what

A

S=I+NX
and NX<0
THEN

S<I

Which means that the supply of loanable funds in the eocnomy is low, therefore the economy will borrow money from the rest of the world

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19
Q

How do countries borrow or lend from the rest of the world

A

by issuing bonds or stocks

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20
Q

Balance of payments

A

a country’s transactions with the rest of the world, summarized by a set of accounts

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21
Q

Balance of payments lay out

A

Current Account
Financial Account

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22
Q

The Current Account

A

the transactions above the line, that record payments to and from the world

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23
Q

The Financial Account

A

the transactions below the line, represeting a country’s borrowing or lending in International market

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24
Q

Balance of Payments

A

Above the line: trade of goods
Below the line: trade of financial securities

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25
Net Capital Outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners- its called net foreign investment purchase of foreign assets by dom resdidents- purchase of dom assets by foreigners
26
The flow of capital in net capital outflow are determined by
Foreign direct INvestmetn and Foreign portfolio investment
27
Foreign Direct Investment
28
Foreign Portfolio Investment
29
Net Exports vs Net Capital Outflow
Net Exports: imblanace of country's exports and imports Net Capital Outflow: imbalance between amount of foreign assets bought by dom res and amount of dom assets bought by foreigners
30
When NCO>0, what is it
"Capital Outflow" more domestic residents buying foreign assets then foreign residents buying domestic assets Lending>Borrowing
31
When NCO<0, what is it
"Capital Inflow" more domestic assets exceed domestic purchases of foreign assets Borrowing>Lending
32
What is the relationship between NCO and NX
They are NCO=NX
33
What happens to NCO when NX>0
Country is selliing more goods and servies to foreigners than buying buying foreign assets w foreign currency it recieves from selling goods and services abroad capital fllowing out of the country NCO>0
34
What happens to NCO when NX<0
WHEN there is a trade deficit, country must borrow money from international market MONEY IS FLOWING IN!!!!! SO! NCO<0 AS WELL THERE IS NET CAPITAL INFLOW
35
What is NCO when exonomy closed
0
36
How is gdp fromula impacted by NCO=NX
Y=C+I+G+NX Y=C+I+G+NCO
37
HOW is savings related to Net Capital Outfllow
If in a open econ S=I+NX IF S>I, then more supply moey, money flowing outwards, SO NCO>0 IF S
38
If S
borrow, NCO<0, capital inflow
39
If S>I in open economy, what happens to NCO
lend, because more money, NCO>0
40
Real Exchange Rate
Not observable (relative prices of goods)
41
Nominal Exchange rate
relative price of currencies (USD TO CAD)
42
43
Nominal Exchange rate
the rate at which a person can trade the currency of one country for the currency of another
44
Appreciation OF DOMestic currency
increas in tthe value of the domestic currency as measured by the amount of foreign currency it can buy 10 CAD=1 Usd
45
Deprecaiiton of domestic currency
decrease in the value of domestic currency as measured by the amount of foreign currency it can buy 0.0001 CAD= USD
46
Real Exchange Rate, what is the price of domestic goods in domestic CURRENCY What is the price of foreign goods in foreign dollars NOMINAL exchange rate price of domestic good in foreign dollar so wha tis the real exchange rate
P P* e e x P reak exchange rate = (e x P)/P*
47
Can the nominal rate be in 2 ways?
Yeah! 0.5 CAD= 1 USD 1 USD= 0.5 CAD
48
When you compare nominal and real exchange rates, what does it mean when they are close together vs far apart
close together, means that the price of the goods are relatively equal in both countries Far apart, means the price of the goods are relatively unequal in tboh countries
49
Purchasing Power Partiy
theory of exchange rates where a unit of any given currency should be able to buy the same quantitiy of goods in all countries
50
PPP based on?
LOP(law of one price) basically this theory says that a currency should have the same purchasing power in all countrises
51
why is ppp model not always accurate
because exchange rates do not always move together
52
Balnce payment sheet wont be included
THE CAPITAL ACCOUNTS STUFF
53
Oppeness in financial markets
ability to choose between domestic and foreign financial assets
54
financial assets
stock and bond
55
where are ifnancial assets sold
financial markets
56
where are ifnancial assets sold
financial markets
57
what is the financial market eqivalent of trade restrictions
capital controls
58
WHY IS TRADE SURPLUS GOOD!
BECAUSE S=I+NX TRADE SURPLUS MEANS THAT S>I, WHICH MEANS THERE IS MORE SAVINGS AND COUNTRY CAN LEND GLOBALLY
59
WHY IS TRADE DEFIICT BAD
BECAUSE S=I+NX TRADE DEFICIT MEANS S
60
what does purchasing power parity imply
the real exchange rate should be equal to 1
61
what does ppp say about exhange rate
that it should be a reflection of the different price levels in both countries e= P*/P exchange rate= foreign price/dome price

ECON 203 (16 decks)

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