Macro Ch. 13

Variables that influence net exports

1. consumer preferences for foreign and domestic goods 2. prices of goods at home and abroad 3. incomes of consumers at home and abroad 4. exchange rate at which foreign currency trades for domestic currency 5. transportation costs from country to country 6. government policies

Variables that influence net capital ouflow

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

Balanced trade

A situation in which exports equals imports

Depreciation

a decrease in the value of a currency as measured by the amount of foreign currency it can buy; dollar buys less foreign currency; weak

Purchasing-power parity

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

Closed economy

an economy that does not interact with other economies in the world

Open economy

an economy that interacts freely with other economies around the world

Trade surplus

an excess of exports over imports; net exports are positive, indicating that the country sells more goods and service abroad than it buys from other countries

Trade deficit

an excess of imports over exports; net exports are negative, indicating that the country sells fewer goods and services abroad than it buys from other countries

Appreciation

an increase in the value of a currency as measured by the amount of foreign currency it can buy; dollar buys more foreign currency; strong

Foreign direct investment

domestic residents actively manage the foreign investment

Negative NCO

domestic residents are buying less foreign assets then foreigners are buying domestic assets, capital is flowing into the country and the country is experiencing a capital inflow

Positive NCO

domestic residents are buying more foreign assets than foreigners are buying domestic assets, capital is flowing out of the country

Foreign portfolio investment

domestic residents purchase foreign stocks or bonds, supplying "loanable funds" to a foreign firm

Imports

goods and services that are produced abroad and sold domestically

Exports

goods and services that are produced domestically and sold abroad

Law of one price

the notion that a good should sell for the same price in all markets

Arbitrage

the process of taking advantage of price differences for the same item in different markets

Net capital outflow

the purchase of foreign assets by domestic residents minus the purchases of domestic assets by foreigners; net foreign investment

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

Net exports

the value of a nations exports minus the value of its imports also called the trade balance

Trade balance

the value of a nations exports minus the values of its imports also called net exports