ECON 101: Chapter 18
e= formula
P*/P
If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has...
appreciated. other things the same, the appreciation would make Americans more likely to travel to Japan
if one country's currency appreciate the other country's currency must...
depreciate
If the US real exchange rate appreciates, US exports to Europe,
fall and the European exports to the US rise
P*=
foreign price in foreign currency
A depreciation of the US real exchange rate induces US consumers to buy...
more domestic goods and fewer foreign goods
NCO measures the imbalance in a country's trade in assets: what happens when NCO<0
"capital inflow"; foreign purchases of domestic assets exceed domestic purchases of foreign assets (Dubai buys more US stuff than US buys theirs)
A Ford Escape SUV sells for $24,000 in the US and 720,000 rubles in Russia. If purchasing power parity holds, what is the nominal exchange rate (rubles per dollar)?
30 rubles per dollar
Which of the following statements about a country with a trade deficit is not true?
C!!! A. exports<imports B. Net capital outflow<0 C. investment<saving D. Y<C+I+G
Y-C-G=
I+NX
S=
I+NX sinse S=Y-C-G; and S=I+NCO
what is the accounting identity and how does it arise?
NCO=NX=S-I; every transaction that affect NX also affect NCO by same amount; every international transaction involves the exchange of an asset for a good or service; this is because extra money sent to foreign countries must be spent somewhere and in this case it is spent to purchase assets in other countries
what happens when currency appreciates to exports, imports, GDP, and NX?
decrease, increase, decrease, decrease
when a Mexican citizen goes to the bank to make the exchange they _______ dollars and _______ pesos
demand; supply
closed economy
does not interact with other economies in the world
P=
domestic price
foreign direct investment
domestic residents actively manage the foreign investment (ex: mcdonald opens outlet in Moscow)
foreign portfolio investment
domestic residents purchase foreign stocks or bonds supplying "loanable funds" to a foreign firm
trade surplus
excess in exports of imports; X>M; NX>0; increases GDP
what happens when S>I?
excess loanable funds flow abroad in the form of positive net capital outflow
trade deficit
excess of imports over exports; X<M; NX<0; decreases GDP
balanced trade
exports = imports
nominal exchange rate
rate at which one country's currency trades for another, relative price of the currency of two countries
If you are vacationing in France and the dollar depreciates relative to the euro, then...
the dollar buys fewer euros. it will take more dollars to buy a good that cost 50 euros
when do national savings decrease?
when excess loanable funds flow abroad in the form of positive NCO
NCO measures the imbalance in a country's trade in assets: what happens when NCO>0
"capital outflow"; domestic purchases of foreign assets exceed foreign purchases of domestic assets (US buys more Dubai stuff than Dubai buys ours)
If a country has a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be?
$60 billion
If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by...
Buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Honduras
What do you think would happen to US net exports if Price of goods produced in Mexico rise faster than the prices of goods produced in the US
US NX increase
what happens when a foreigner purchases a good from the US
US exports and NX increases; foreigner pays with currency/assets, so the US acquires some foreign assets, causing NCO to rise
what happens when a US citizen buys foreign goods?
US imports rise and NX falls; the US buyer pays with US dollars or assets so the other country acquires US assets causing US NCO to fall
What do you think would happen to US net exports if Canada experiences a recession (falling incomes, rising unemployment)
US net exports would fall due to a fall in Canadian consumers' purchases of US exports
What do you think would happen to US net exports if US consumers decide to be patriotic and buy more products "Made in the USA"
US net exports would rise due to a fall in imports
If Chileans buy more US stocks and bonds and US residents buy more Chilean wine, then....
both US NX and US NCO outflow fall
depreciation "weakening"
decrease in the value of currency as measured by the amount of foreign currency it can buy
countries with high inflation rates should have...
depreciating currencies
Suppose more Mexican citizens want to purchase American goods. This increases the demand for -__________ and the supply of ________.
dollars; pesos
An Italian company builds and operates a pasta factory in the US. This is an example of Italian...
foreign direct investment that increases Italian NCO
what happens when S<I?
foreigners are financing some of the country's investment, and NCO<0
imports
goods and services produced abroad and sold domestically
exports
goods and services produced domestically and sold abroad
arbitrage
if a good sells for different prices in 2 different places then you can make a quick profit by buying at low price and selling at high price, eventually makes prices equal
appreciation "strengthening"
increase in the value of currency as measured by the amount of foreign currency it can buy
what happens when currency depreciates to exports, imports, GDP, and NX?
increase, decrease, increase, increase
open economy
interacts freely with other economies around the world
what happens when a country runs a trade deficit? what do foreigners do with that extra money? where do they purchase those assets?
it sends more money to foreign countries than it receives in return; use it to purchase interest-bearing assets; wherever they receive the highest return
If a US real exchange rate appreciates, US goods become...
more expensive relative to foreign goods
if someone from Mexico wants to buy something in the US they need to go to the bank and exchange pesos for dollars. the number of dollars they get back for their pesos depend on what?
nomina exchange rate
e=
nominal exchange rate, foreign currency per unit of domestic currency
law of one price
notion that a good should sell for the same price in all markets
Net Capital Outflow (NCO) aka Net Foreign Investment
our purchase of foreign assets-foreign purchases of our assets
the nominal exchange rate is the...
rate at which a person can trade the currency of one country for another
natural rate hypothesis
the claim that unemployment eventually returns to its normal, or natural rate regardless of the rate of inflation
real exchange rate
the rate at which goods and services of one country trade for the goods and services of another, relative price of the goods and services of two countries
inflation tax
the revenue the government raises by creating money
purchasing power parity PPP
theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries
6 variables that influence net exports
things that affect the relative desirability of a country's goods and services: 1. consumers' preferences for foreign and domestic goods 2. prices of goods at home and abroad 3. income of consumers at home and abroad 4. the exchange rates at which foreign currency trades for domestic currency 5. transportation costs 6. government policies
4 variables that influence NCO
things that affect the relative return on interest bearing assets in different countries: 1. real interest rates paid on foreign assets 2. real interest rates paid on domestic assets 3. perceived risks of holding foreign assets 4. government policies affecting foreign ownership of domestic assets
how can saving be used?
to finance domestic investment or buy assets abroad
when do national savings increase?
when an economy grows
real exchange rate formula
(e x P)/P*
calculate the real exchange rate, measured as Mexican lattes per US latte e=10 pesos per $; price of a latte: P=$3 in US; P*=24 pesos in Mexico
1.25 Mexican lattes per US latte
what is a price of a US latte measured in pesos? e=10 pesos per $; price of a latte: P=$3 in US; P*=24 pesos in Mexico
30 pesos per US latte
Net exports (NX), aka the trade balance
= value of exports - value of imports; measures the imbalance in a country's trade in goods and services
Y=
C+I+G+NX(X-M)
A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a US company. As a result of these transactions, Chinese...
NX decrease and US NCO decreases
