ECO 252 Chapter 18

Net exports equation

(value of country's exports) - (value of country's imports)

Balanced trade

a situation in which exports equal imports

Exports

domestically produced goods and services that are sold abroad

If the United States saves $1,000 billion and U.S. net capital outflow is -$200 billion, U.S. domestic investment is

$1,200 billion.

How trade surplus and deficits effect the economy as a whole:

- When a nation is running a trade surplus (NX > 0), it sells more goods and services to foreigners than it buys from them. The nation must use this foreign currency to buy foreign assets. Capital is flowing out of the country. - When a nation is running a trade deficit (NX < 0), it is buying more goods and services from foreigners than it is selling to them. The nation must sell assets abroad in order to finance the net purchase of these goods and services in the world market. Capital is flowing into the country (NCO < 0)

Which of the following statements is true about a country with a trade deficit a. Net exports are negative. b. Net capital outflow must be positive. c.Exports exceed imports. d. Net exports are positive. e. none of these answers

. Net exports are negative.

Suppose the nominal exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. Further, suppose that a pound of hamburger costs $2 in the United States and 250 yen in Japan. What is the real exchange rate between Japan and the United States?

0.8 pounds of Japanese hamburger per lb of US rice

Suppose a cup of coffee is 1.5 euros in Germany and $0.50 in the United States. If purchasing-power parity holds, what is the nominal exchange rate between euros and dollars?

3 euros per dollar

Suppose the real exchange rate between Russia and the United States is defined in terms of bottles of Russian vodka per bottle of U.S. vodka. Which of the following will increase the real exchange rate (that is, increase the number of bottles of Russian vodka per bottle of U.S. vodka)? a. an increase in the price in dollars of US vodka b. None of the changes described in these answers will increase the real exchange rate. c. an increase in the number of roubles for which the dollar can be exchanged d. All of the changes described in these answers will increase the real exchange rate. e. a decrease in the price in roubles of Russian vodka

All of the changes described in these answers will increase the real exchange rate.

Which of the following people or firms would be pleased by a depreciation of the dollar? . All the people and firms mentioned in these answers. b. A French exporter of wine to the US c. An French tourist visiting New York. d. A US importer of French wine. e. A US company that wishes to expand abroad by building a factory in Poland.

An French tourist visiting New York.

Which of the following would directly increase U.S. net capital outflow? a. Rolls Royce sells an aircraft engine to Boeing of the USA. b. The Japanese financial company Nomura buys shares in Vodafone. c. An american oil company builds a new oilrig in Venezuela. d. Honda builds a new plant in the U.S.

An american oil company builds a new oilrig in Venezuela.

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow? a. An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged. b. For a given amount of saving, an increase in net capital outflow must decrease domestic investment. c. For a given amount of saving, a decrease in net capital outflow must decrease domestic investment. d. Saving is the sum of investment and net capital outflow.

For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.

If Japan exports more than it imports,

Japan's net capital outflow must be positive.

Which of the following is an example of foreign direct investment? a. General Motors buys steel from South Korea. b. General Motors of the USA buys shares in Saab of Sweden. c. McDonald's builds a restaurant in Moscow. d. UK publisher Bloomsbury sells the rights to make a film of a Harry Potter book to an American film studio.

McDonald's builds a restaurant in Moscow.

Suppose a U.S. resident buys a Jaguar automobile from Great Britain and the British exporter uses the receipts to buy stock in General Electric. Which of the following statements is true from the perspective of the United States?

Net exports rise, and net capital outflow rises.

Real exchange rate equation

Real exchange rate = (nominal exchange rate x domestic price) / (foreign price)

National savings is income of the nation that is left after paying current consumption and government purchases: S = Y - C - G. if we rearrange the equation to reflect this fact, we obtain:

S = I + NCO (Saving) = (Domestic Investment) + (Net Capital Outflow)

The economy's GDP (Y) is divided among four components: consumption ©, investment (I), government purchases (G), and net exports (NX). We write this as:

Y = C + I + G + NX (economy's GDP) = (consumption) + (investment) + (government purchases) + (net exports)

Purchasing-power parity

a theory of exchange rats whereby a unit of any given currency should be able to buy the same quantity of goods in all countries.

Net exports

any country are is the difference between the value of its exports and the value of its imports

If the nominal exchange rate between British pounds and dollars is 0.5 pound per dollar, how many dollars can you get for a British pound? a. 1.5 dollars b. 0.5 of a dollar c. 1 dollar d.2 dollars e. none of these answers

d.2 dollars

Purchasing power equation

e / P*

nominal exchange rate equation

e = P*/P

Which of the following products would likely be the least accurate if used to calculate purchasing-power parity? a. Diamonds b. Gold c. Cars d. Wheat e. Dental services

e. Dental services

Imports

foreign-produced goods and services that are sold domestically

Suppose the money supply in Mexico grows more quickly than the money supply in the United States. We would expect that

the Mexican peso should depreciate relative to the US dollar.

If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar,

the euro has appreciated.

Suppose the inflation rate over the last 20 years has been 10 percent in Great Britain, 7 percent in Japan, and 3 percent in the United States. If purchasing-power parity holds, which of the following statements is true ? Over this period, a. the value of the dollar should have fallen compared to the value of the pound and the yen. b. none of these answers c. the yen should have fallen in value compared to the pound and risen compared to the dollar. d. the value of the pound should have risen compared to the value of the yen and the dollar. e. the yen should have risen in value compared to the pound and fallen compared to the dollar.

the yen should have risen in value compared to the pound and fallen compared to the dollar.

Depreciation

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

An economy that interacts with other economies is known as

an open economy.

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

arbitrage.

Trade surplus

occurs when a country has an excess of exports over imports

Net capital outflow

the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

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

Net capital outflow equation

(Net capital outflow) = (purchase of foreign assets by domestic residents) - (Purchase of domestic assets by foreigners)

Real exchange rate equation:

(real exchange rate) = (e x P) / (P*) P = price index for a basket P* = price index for a foreign basket e = Nominal exchange rate between the currencies

Trade Deficit characteristics

- Exports < Imports - Net Exports < 0 - Y < C + I + G - Saving < Investment - Net capital outflow < 0

Balanced Trade characteristics

- Exports = Imports - Net Exports = 0 - Y = C + I + G - Saving = Investment - Net capital outflow = 0

Trade Surplus characteristics

- Exports > Imports - Net exports > 0 - Y > C + I + G - Saving > Investment - Net capital outflow > 0

Some important variables that influence net capital outflow:

- Real interest rates paid on foreign assets - Real interest rates paid on domestic assets - The perceived economic and political risk of holding assets abroad - The government policies that affect foreign ownership of domestic assets

Trade deficit

an excess of imports over exports

The most accurate measure of the international value of the dollar is

an exchange rate index that accounts for many exchange rates.

Appreciation

an increase in the value of a currency as measured by the amount of foreign currency it can buy

In a closed economy

net capital outflow is zero (NCO = 0), so saving equals investment (S = I).

For an economy as a whole, net capital outflow (NCO) must always equal

net exports (NX)

Nominal exchange rate

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

Trade balance

the value of a nation's exports minus the value of its imports; also called net exports