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