W1P4 - NotebookLM Flashcards
What is the nominal exchange rate?
The price of one currency in terms of another. It can be expressed in British terms (foreign currency per British pound) or European terms (domestic currency per unit of foreign currency).
What is the presenter’s convention for nominal exchange rates?
The presenter uses British terms, defining the nominal exchange rate as how much foreign currency you get for one British pound. An increase in the nominal rate (S) indicates an appreciation, while a decrease indicates a depreciation.
What is the real exchange rate?
It adjusts for price differences between countries. It’s the ratio of domestic to foreign price levels, converted to a common currency.
How do nominal and real exchange rates relate in the short run?
In the short run, fluctuations in the real exchange rate are mainly driven by the nominal rate.
What is the effective exchange rate?
A weighted average of a country’s exchange rates with its trade partners. It provides a broader view of a currency’s performance than looking at a single exchange rate.
How do you calculate real effective exchange rate?
Take the geometric mean of nominal exchange rates, adjusted for price levels, weighted by trade shares with each country.
What are the challenges of using CPI data to determine price level?
CPI data’s absolute levels are not directly comparable across countries; the evolution over time is what matters.
What are the external terms of trade?
The ratio of a country’s export prices to its import prices. It can be used to approximate the price level.
What are the internal terms of trade?
The ratio of prices of non-traded goods to traded goods. This can act as a measure for the domestic price level (P).
How does an appreciating real exchange rate affect the trade balance?
It makes exports more expensive and imports cheaper, leading to a decrease in net exports.
How does a depreciating exchange rate affect trade balance?
It makes exports cheaper and imports more expensive, which should lead to an increase in net exports.
