Ch 18 Macro Study Guide

NX<0

(trade deficit) - buying more goods and services from foreigners (than it is selling to them)

When NX>0

(trade surplus) - selling more goods and services to foreigners (than it is buying from them)

Factors that might influence a country's exports, imports, and net exports: continued

- Incomes of consumers at home and abroad - Cost of transporting goods from country to country - Government policies toward international trade

Variables that influence net capital outflow

- Real interest rates paid on foreign assets - Real interest rates paid on domestic assets - Perceived economic and political risks of holding assets abroad - Government policies that affect foreign ownership of domestic assets

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

An appreciation (rise) in the U.S. real exchange rate

- U.S. goods- more expensive compared to foreign goods Consumers at home and abroad - buy fewer U.S. goods and more goods from other countries Lower Exports Higher imports Lower net exportsFoil f

Interacts with other economies:

- buys and sells goods and services in world product markets - it buys and sells capital assets such as stocks and bonds in world financial markets

PPP

- theory of exchange rates - unit of any given currency should be able to buy the same quantity of goods in all countries

depreiciation (weaken)

-Decrease in the value of a currency As measured by the amount of foreign currency it can buy - buy less foreign currency

appreciation (strengthen)

-Increase in the value of a currency As measured by the amount of foreign currency it can buy - Buy more foreign currency

Limitations of PPP

1. many goods are not easily traded 2. even tradable goods are not always perfect substitutes

b. decrease U.S. net exports and increase Swiss net exports.

A Swiss company sells chocolates to a retailer in the United States. These sales by themselves a. decrease U.S. net export and Swiss net exports. b. decrease U.S. net exports and increase Swiss net exports. c. increase U.S. and Swiss net exports. d. increase U.S. net exports and decrease Swiss net exports.

d. decreases U.S. net exports, and decreases U.S. net capital outflow.

A U.S. purchase of oil from overseas paid for with foreign currency it already owned a. increases U.S. net exports, and increases U.S. net capital outflow. b. increases U.S. net exports, and decreases U.S. net capital outflow. c. decreases U.S. net exports, and increases U.S. net capital outflow. d. decreases U.S. net exports, and decreases U.S. net capital outflow.

4/3 so the good is more expensive in the U.S.

A good in the U.S. costs $20. The same good costs 150 pesos in Mexico. If the nominal exchange rate is 10 pesos per dollar, what is the real exchange rate? 4/3 so the good is more expensive in the U.S. 4/3 so the good is more expensive in Mexico 3/4 so the good is more expensive in the U.S. 3/4 so the good is more expensive in Mexico

c. 1/2 pound per dollar

According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate? a. 2 pounds per dollar b. 1 pound per dollar c. 1/2 pound per dollar d. None of the above is correct

both U.S. net exports and U.S. net capital outflows have risen.

An Italian company exchanges euros for dollars from U.S. residents and then uses the dollars to buy U.S. products to sell in its stores in Rome. U.S. residents who exchanged their dollars for euros use the euros to buy bonds issued by French corporations. At this point both U.S. net exports and U.S. net capital outflows have risen. both U.S. net exports and U.S. net capital outflow have fallen. U.S. net exports have risen and U.S. net capital outflow have fallen. U.S. net exports have fallen and U.S. net capital outflow have risen.

c. a U.S. import and a Chinese export.

Dave, a U.S. citizen buys a bicycle manufactured in China. Dave's purchase is a. both a U.S. and Chinese export. b. both a U.S. and Chinese import. c. a U.S. import and a Chinese export. d. a U.S. export and a Chinese import.

Closed Economy

Economy that does not interact with other economies in the world

Trade surplus (positive net exports)

Exports are greater than imports - the country sells more goods and services abroad than it buys from other countries

imports.

Foreign-produced goods and services that are purchased domestically are called imports. exports. net imports. net exports.

a. 2

If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate? a. 2 b. 3/2 c. 2/3 d. 1/2

decrease, and U.S. net capital outflow decreases.

If a U.S. shirt maker purchases cotton from Egypt, U.S. net exports increase, and U.S. net capital outflow increases. increase, and U.S. net capital outflow decreases. decrease, and U.S. net capital outflow increases. decrease, and U.S. net capital outflow decreases.

rises and the net capital outflow of other countries fall.

If a country changes its corporate tax laws so that domestic businesses build and manage more business in other countries, then the net capital outflow of that country and the net capital outflow of other countries rise. rises and the net capital outflow of other countries fall. falls and the net capital outflow of other countries rise. None of the above are correct.

positive net capital outflow and positive net exports.

If a country has Y > C + I + G, then it has positive net capital outflow and positive net exports. positive net capital outflow and negative net exports. negative net capital outflow and positive net exports. negative net capital outflow and negative net exports.

d. it has negative net exports and negative net capital outflow.

If a country has a trade deficit a. it has positive net exports and positive net capital outflow. b. it has positive net exports and negative net capital outflow. c. it has negative net exports and positive net capital outflow. d. it has negative net exports and negative net capital outflow.

$40 billion of exports and $32 billion of imports.

If a country has net exports of $8 billion and sold $40 billion of goods and services abroad, then it has $48 billion of imports and $40 billion of exports. $48 billion of exports and $40 billion of imports. $40 billion of imports and $32 billion of exports. $40 billion of exports and $32 billion of imports.

-$100 billion and the U.S. has a trade deficit.

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is $100 billion and the U.S. has a trade surplus. $100 billion and the U.S has a trade deficit. -$100 billion and the U.S. has a trade surplus. -$100 billion and the U.S. has a trade deficit.

b. as many goods in foreign countries as it does in the United States.

If purchasing-power parity holds, a dollar will buy a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity.

c. real exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas.

If purchasing-power parity holds, then the value of the a. nominal exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas. b. nominal exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the U.S. price level divided by the foreign country's price level. c. real exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas. d. real exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the U.S. price level divided by the foreign country's price level.

$5.

If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs $1.80. $4.80. $5. None of the above is correct.

c. $5.

If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs a. $1.80. b. $4.80. c. $5. d. None of the above is correct.

2.50

If the exchange rate is 1.25 New Zealand dollars per U.S dollar, the price of apples is $2 a pound in the U.S. and 1 New Zealand dollar per pound in New Zealand, what is the real exchange rate? 2.50 2 1.25 .75

125 Egyptian pounds

If the exchange rate is 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars costs 125 Egyptian pounds 50 Egyptian pounds 5 Egyptian pounds None of the above is correct.

a. 125 Egyptian pounds

If the exchange rate is 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars costs a. 125 Egyptian pounds b. 50 Egyptian pounds c. 5 Egyptian pounds d. None of the above is correct.

Trade deficit (negative net exports)

Imports are greater than exports - the country sells fewer goods and services abroad than it buys from other countries

4/7 cans of Belgian coffee per can of U.S. coffee

In the United States, a three-pound can of coffee costs about $5. If the exchange rate is 0.8 euros per dollar and a three-pound can of coffee in Belgium costs 7 euros. What is the real exchange rate? 7/4 cans of Belgian coffee per can of U.S. coffee 5.6/5 cans of Belgian coffee per can of U.S. coffee 5/5.6 cans of Belgian coffee per can of U.S. coffee 4/7 cans of Belgian coffee per can of U.S. coffee

$30 billion

Last year a country had exports of $100 billion, imports of $70 billion, and purchased $60 billion worth of foreign assets. What was the value of domestic assets purchased by foreigners? $70 billion $40 billion $30 billion $10 billion

decrease U.S. net exports and increase Italian net exports.

Lydia, a citizen of Italy, produces scarves and purses that she sells to department stores in the United States. Other things the same, these sales increase U.S. net exports and have no effect on Italian net exports. decrease U.S. net exports and have no effect on Italian net exports. increase U.S. net exports and decrease Italian net exports. decrease U.S. net exports and increase Italian net exports.

capital is flowing into the country

NCO<0

=NX

NCO=

capital is flowing out of the country

NCO>0

foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.

Net capital outflow measures the imbalance between the amount of foreign assets held by domestic residents and domestic assets held by foreign residents. foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners. None of the above is correct.

goods and services exported minus the value of goods and services imported.

Net exports of a country are the value of goods and services imported minus the value of goods and services exported. goods and services exported minus the value of goods and services imported. goods exported minus the value of goods imported. goods imported minus the value of goods exported.

b. $-20 and $20

Oceania buys $100 of wine from Escudia and Escudia buys $80 of wool from Oceania. Suppose this is the only trade that these countries do. What are the net exports of Oceania and Escudia, in that order? a. $80 and $100 b. $-20 and $20 c. $20 and -$20 d. None of the above is correct.

​prices in the U.S. were higher, or the number of euro the dollar purchased were higher.

Other things the same, the real exchange rate between U.S. and Belgian goods would be higher if ​prices in the U.S. were higher, or the number of euro the dollar purchased were higher. ​prices in the U.S. were higher, or the number of euro the dollar purchased were lower. ​prices in the U.S. were lower, or the number of euro the dollar purchased were higher. ​prices in the U.S. were lower, or the number of euro the dollar purchased were lower.

Purchasing-power parity

PPP

PPP

Parity: equality Purchasing-power: value of money in terms of quantity of goods it can buy

b. a U.S. export and a Canadian import

Paul, a Canadian citizen, purchases oranges grown in Florida. This purchase is an example of a. a U.S. import and a Canadian export b. a U.S. export and a Canadian import c. an export for both the U.S. and Canada d. an import for both Canada and the U.S.

(nominal exchange rate x Domestic price) / foreign price

Real Exchange Rate =

(e x P) / P*

Real Exchange rate =

Arbitrage

Take advantage of price differences for the same item in different markets - Result: the law of one price

d. the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods.

The dollar is said to appreciate against the euro if a. the exchange rate falls. Other things the same, it will cost fewer euros to buy U.S. goods. b. the exchange rate falls. Other things the same, it will cost more euros to buy U.S. goods. c. the exchange rate rises. Other things the same, it will cost fewer euros to buy U.S. goods. d. the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods.

d. negative net exports with Australia and a trade deficit with Australia.

The value of the goods and services Australia purchases from the U.S. are less than the value of goods and services the U.S. purchases from Australia. The U.S. has a. positive net exports with Australia and a trade surplus with Australia. b. positive net exports with Australia and a trade deficit with Australia. c. negative net exports with Australia and a trade surplus with Australia. d. negative net exports with Australia and a trade deficit with Australia.

Depreciation (fall) in the U.S. real exchange rate

U.S. goods - cheaper relative to foreign goods Consumers at home and abroad - buy more U.S. goods and fewer goods from other countries Higher exports Lower imports Higher net exports

a U.S. import and an Irish export.

When Jamie, a U.S. citizen, purchases a wool jacket made in Ireland, the purchase is both a U.S. and Irish import. a U.S. import and an Irish export. a U.S. export and an Irish import. neither an export nor an import for either country.

c. A U.S. beverage company opens a bottling plant in Russia.

Which of the following is an example of U.S. foreign direct investment? a. A Greek company opens a cheese factory in the U.S. b. A German mutual fund buys stock issued by a U.S. corporation. c. A U.S. beverage company opens a bottling plant in Russia. d. A U.S. bank buys bonds issued by an Argentinean company.

Nancy, a U.S. citizen, buys bonds issued by a Japanese bank.

Which of the following is an example of U.S. foreign portfolio investment? Albert, a German citizen, buys stock in a U.S. computer company. Larry, a citizen of Ireland, opens a fish and chips restaurant in the United States. Nancy, a U.S. citizen, buys bonds issued by a Japanese bank. Dustin, a U.S. citizen, opens a country-western tavern in New Zealand.

b. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars.

You are planning a graduation trip to Mexico. Other things the same, if the dollar depreciates relative to the peso, then a. the dollar buys fewer pesos. Your hotel room in Mexico will require fewer dollars. b. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars. c. the dollar buys more pesos. Your hotel room in Mexico will require fewer dollars. d. the dollar buys more pesos. Your hotel room in Mexico will require more dollars.

Theory of purchasing power parity (Nominal Exchange rate) (price levels)

___________ between the currencies of two countries must reflect the ________ in those countries

Basic logic of purchasing-power parity

based on the law of one price & a good must sell for the same price in all locations

Open Economy

economy that interacts freely with other economies around the world

balanced trade

exports equal imports

Imports

goods and services that are produced abroad and sold domestically

Exports

goods and services that are produced domestically and sold abroad

then the real exchange rate cannot change

if purchasing power of the dollar is always the same at home and abroad...

Net Exports (NX)

imbalance between a countrys exports and its imports exports - imports

e

nominal exchange rate between the U.S. dollar and foreign currencies

P

price index for U.S. basket

P*

price index for foreign basket

(not a perfect theory) (fluctuate)

purchasing power parity is __________ theory of exchange rate determination and real exchange rates _______ over time

Net capital overflow (NCO)

regarding the amount of stuff that is bought - purchase of foreign assets by domestic residents (FDI, FPO) - minus the purchase of domestic assets by foreigners

Net Capital Outflow (NCO)

the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners

nominal exchange rate

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

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

Trade balance (Net exports)

value of a nations exports minus the value of its imports

Net exports (trade balance)

value of a nations exports minus the value of its imports Exports - Imports