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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
Q

Net Capital Outflow

A

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
Q

The flow of capital in net capital outflow are determined by

A

Foreign direct INvestmetn

and

Foreign portfolio investment

27
Q

Foreign Direct Investment

A
28
Q

Foreign Portfolio Investment

A
29
Q

Net Exports vs Net Capital Outflow

A

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
Q

When NCO>0, what is it

A

“Capital Outflow”

more domestic residents buying foreign assets then foreign residents buying domestic assets

Lending>Borrowing

31
Q

When NCO<0, what is it

A

“Capital Inflow”

more domestic assets exceed domestic purchases of foreign assets

Borrowing>Lending

32
Q

What is the relationship between NCO and NX

A

They are NCO=NX

33
Q

What happens to NCO when NX>0

A

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
Q

What happens to NCO when NX<0

A

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
Q

What is NCO when exonomy closed

A

0

36
Q

How is gdp fromula impacted by NCO=NX

A

Y=C+I+G+NX

Y=C+I+G+NCO

37
Q

HOW is savings related to Net Capital Outfllow

A

If in a open econ S=I+NX

IF S>I, then more supply moey, money flowing outwards, SO NCO>0

IF S<I, less supply of money, money flowing inwards, so NCO<0

38
Q

If S<I IN open economy, what happens to NCO

A

borrow, NCO<0, capital inflow

39
Q

If S>I in open economy, what happens to NCO

A

lend, because more money, NCO>0

40
Q

Real Exchange Rate

A

Not observable (relative prices of goods)

41
Q

Nominal Exchange rate

A

relative price of currencies (USD TO CAD)

42
Q
A
43
Q

Nominal Exchange rate

A

the rate at which a person can trade the currency of one country for the currency of another

44
Q

Appreciation OF DOMestic currency

A

increas in tthe value of the domestic currency as measured by the amount of foreign currency it can buy

10 CAD=1 Usd

45
Q

Deprecaiiton of domestic currency

A

decrease in the value of domestic currency as measured by the amount of foreign currency it can buy

0.0001 CAD= USD

46
Q

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

A

P

P*

e

e x P

reak exchange rate = (e x P)/P*

47
Q

Can the nominal rate be in 2 ways?

A

Yeah!

0.5 CAD= 1 USD
1 USD= 0.5 CAD

48
Q

When you compare nominal and real exchange rates, what does it mean when they are close together vs far apart

A

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
Q

Purchasing Power Partiy

A

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
Q

PPP based on?

A

LOP(law of one price)

basically this theory says that a currency should have the same purchasing power in all countrises

51
Q

why is ppp model not always accurate

A

because exchange rates do not always move together

52
Q

Balnce payment sheet wont be included

A

THE CAPITAL ACCOUNTS STUFF

53
Q

Oppeness in financial markets

A

ability to choose between domestic and foreign financial assets

54
Q

financial assets

A

stock and bond

55
Q

where are ifnancial assets sold

A

financial markets

56
Q

where are ifnancial assets sold

A

financial markets

57
Q

what is the financial market eqivalent of trade restrictions

A

capital controls

58
Q

WHY IS TRADE SURPLUS GOOD!

A

BECAUSE S=I+NX

TRADE SURPLUS MEANS THAT S>I, WHICH MEANS THERE IS MORE SAVINGS AND COUNTRY CAN LEND GLOBALLY

59
Q

WHY IS TRADE DEFIICT BAD

A

BECAUSE S=I+NX

TRADE DEFICIT MEANS S<I, WHICH MEANS THERE IS LESS SAVINGS AND COUNTRY HAS TO BORROW GLOBALLY

60
Q

what does purchasing power parity imply

A

the real exchange rate should be equal to 1

61
Q

what does ppp say about exhange rate

A

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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