Unit 5 - The Macroeconomics of Open Economics Flashcards
Benefits of being Open International Trade
Trade allows people to produce what they produce best and to consume the great variety of goods and services produced around the world.
What is a Closed Economy
an economy that does not interact with other economies in the world
What is a Open Economy
an economy that interacts freely with other economies around the world
How does an Open Economy interact with other economies?
Buys and sells goods and services in world product markets.
Buys and sells capital assets such as stocks and bonds in world financial markets.
Exports
are domestically produced goods and services that are sold abroad
Imports
are foreign-produced goods and services that are sold domestically
Net Exports
the value of a nation’s exports minus the value of its imports; also called the trade balance
net exports tell us whether a country is, in total, a seller or a buyer in world markets for goods and services
Net Exports = Value of country’s exports - Value of country’s imports
Trade Balance
the value of a nation’s exports minus the value of its imports; also called net exports
T or F
If net exports are positive, exports are greater than imports, indicating that the country sells more goods and services abroad than it buys from other countries
True
Trade Surplus
an excess of exports over imports
T or F
If net exports are negative, exports are less than imports, indicating that the country sells fewer goods and services abroad than it buys from other countries.
True
Trade Deficit
an excess of imports over exports
T or F
If net exports are zero, its exports and imports are exactly equal, and the country is said to have balanced trade.
True
Balanced Trade
A situation in which exports equal imports
Factors that might influence a country’s exports, imports, and net exports.
-tastes of consumers for domestic and foreign goods
-prices of goods at home and abroad
-exchange rates at which people can use domestic currency to buy
-foreign currencies
-incomes of consumers at home and abroad
-cost of transporting goods from country to country
-government policies toward international trade
T or F
Technological progress has also fostered international trade by changing the kinds of goods that economies produce.
True
T or F
The Canada–U.S. Auto Pact, signed in 1965, made it possible for automobile manufacturers to move auto parts and finished automobiles across the Canada–U.S. border without having to pay import duties.
True
T or F
International agreements, such as NAFTA and those negotiated with the World Trade Organization, have gradually lowered tariffs, import quotas, and other trade barriers.
True
Net Capital Outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Net Capital Outflow = Purchase of foreign assets by domestic residents - Purchase of domestic assets by foreigners
T or F
The imposition of trade barriers makes such specialization harder and, as described in the following newspaper article, may lead to higher costs of production and, ultimately, higher prices for consumers.
True
T or F
When a Canadian buys stock in Telmex, the Mexican phone company, the purchase raises Canadian net capital outflow. When a Japanese resident buys a bond issued by the Canadian government, the purchase reduces Canadian net capital outflow.
True
If Tim Hortons opens a fast-food outlet in Russia, that is an example of
foreign direct investment
if a Canadian buys stock in a Russian corporation, that is an example of
foreign portfolio investment
T or F
Canadian residents are buying assets located in another country, so both purchases increase Canadian net capital outflow.
True
T or F
When the Net Capital Outflow is positive, domestic residents are buying more foreign assets than foreigners are buying domestic assets.
True
T or F
When the net capital outflow is negative, domestic residents are buying less foreign assets than foreigners are buying domestic assets.
True
T or F
when net capital outflow is negative, a country is experiencing a capital inflow.
True
T or F
Net exports measure an imbalance between a country’s exports and its imports
True
T or F
Net capital outflow measures an imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners
True
T or F
Net Capital Outflow always = Net Exports
NCO = NX
True
identity
an equation that must hold because of the way the variables in the equation are defined and measured.
Current Balance
= Net exports + Net inflow of dividends and interest payments
the current account balance measures payments received from abroad in exchange for goods and services—including interest and dividend payments—minus analogous payments made to foreigners
T or F
all saving in the Canadian economy shows up as investment in the Canadian economy or as Canadian net capital outflow.
True
Positive Net Capital Outflow
indicating that the nation is using some of its saving to buy assets abroad
Net Capital Outflow is Negative
indicating that foreigners are financing some of this investment by purchasing domestic assets.
Nominal Exchange Rate
the rate at which a person can trade the currency of one country for the currency of another
Appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy
Depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
T or F
When a currency appreciates, it is said to strengthen because it can then buy more foreign currency
True
T or F
when a currency depreciates, it is said to weaken because it can then buy fewer units of foreign currency.
True
T or F
when economists talk about the dollar appreciating or depreciating, they often are referring to an exchange rate index that takes into account many individual exchange rates.
True
T or F
The Canadian-dollar effective exchange-rate index (CERI) is a weighted average of the exchange rates between the Canadian dollar and the currencies of Canada’s major trading partners.
True
The index is currently based on six foreign currencies: the U.S. dollar, the European Union euro, the Japanese yen, the U.K. pound, the Chinese yuan, and the Mexican peso.
Real Exchange Rate
the rate at which a person can trade the goods and services of one country for the goods and services of another
Real Exchange Rate = Nominal Exchange Rate X Domestic Price / Foreign Price
Using Price Indexing:
Real Exchange Rate = (e x P) / P*
This real exchange rate measures the price of a basket of goods and services available domestically relative to a basket of goods and services available abroad.
e = Canadian Dollar and foreign currencies
T or F
the real exchange rate is a key determinant of how much a country exports and imports.
True
T or F
If you decide where to vacation by comparing costs, you are basing your decision on the real exchange rate.
T
Purchasing Power Parity
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
Law of One Price
This law asserts that a good must sell for the same price in all locations.
Arbitrage
The process of taking advantage of differences in prices in different markets
Small Open Economy
an economy that trades goods and services with other economies and, by itself, has a negligible effect on world prices and interest rates
Perfect Capital Mobility
full access to world financial markets
r=rw
Interest Rate Parity
a theory of interest rate determination whereby the real interest rate on comparable financial assets should be the same in all economies with full access to world financial markets
T or F
a theory of interest rate determination whereby the real interest rate on comparable financial assets should be the same in all economies with full access to world financial markets
True
T or F
An economy’s saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net capital outflow.
True
T or F
The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods and services of two countries. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken.
T
T or F
According to the theory of purchasing-power parity, a dollar (or a unit of any other currency) should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies.
T
T or F
Most economists prefer to use a model that describes Canada as a small open economy with perfect capital mobility. In such economies, interest rate parity is expected to hold. Interest rate parity is a theory that predicts interest rates in Canada will equal those in the rest of the world. Due to differences in tax rates and concerns about default risk, interest rates in Canada are not expected to exactly equal those in the rest of the world, but we do expect Canadian interest rates to rise and fall with increases and decreases in world interest rates.
T
