W3P4 - Notebook LM Flashcards
Define trade intensity
Trade intensity is defined as exports plus imports relative to GDP. It indicates the level of international trade activity. A high trade intensity shows a significant level of trade, even if net exports are zero.
Why do international macroeconomic models often focus on the flow of goods and services rather than labour?
Because labour is not particularly mobile across borders compared to goods and services. The flow of goods, services, and investment (capital) is much greater than the flow of labour.
What is added to the goods market in an open economy model?
Net exports (NX), which is the difference between exports and imports, is added to the goods market.
What factors affect exports (X)?
Exports are a function of foreign income and the exchange rate. An increase in foreign income increases exports, while an appreciation of the domestic currency decreases exports.
What factors affect imports (Z)?
Imports are a function of domestic income and the exchange rate. An increase in domestic income increases imports, and an appreciation of the domestic currency increases imports.
How does an increase in domestic income affect net exports (NX)?
An increase in domestic income leads to a decrease in net exports because imports increase.
How does an increase in foreign income affect net exports (NX)?
An increase in foreign income leads to an increase in net exports because exports increase.
How does an appreciation of the domestic currency affect net exports (NX)?
An appreciation of the domestic currency leads to a decrease in net exports because exports decrease and imports increase.
How does a depreciation of the domestic currency affect the IS curve?
A depreciation of the domestic currency shifts the IS curve to the right. This is because net exports increase for any level of interest rate.
How does a change in the real exchange rate affect the IS schedule?
A decrease in the real exchange rate (which is the same as a nominal rate change in this model) shifts the IS schedule to the right.
What determines the slope of the IS curve?
The slope of the IS curve depends on the sensitivity of investment to changes in the interest rate. If investment is very sensitive (elastic), the IS curve is relatively flat. If it’s not very sensitive (inelastic) then the IS curve is relatively steep.
What determines the slope of the LM curve?
The slope of the LM curve depends on the elasticity of money demand with respect to income. A larger increase in money demand for a given increase in income will result in a steeper LM curve.
How does the slope of the LM curve affect the crowding out effect?
A steeper LM curve leads to greater crowding out. This is because a steeper LM curve means an increase in government spending will lead to a larger increase in interest rates and therefore a larger reduction in private investment
