Open Economy: Real Interest Rate, Exchange Rate, and Trade Balance

Imports

Goods and services produced abroad and sold domestically

Exports

Goods and services produced domestically and sold abroad

Saving

Income not spent on consumption or taxes

Appreciation

Increase in the value of a currency

Depreciation

Decrease in the value of a currency

Capital flight

Large and sudden reduction in the demand for assets located in a country

Import quota

Limit on the quantity of imports

Net capital outflow (NCO)

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

Investment

Purchase of new capital goods

Real exchange rate

Rate at which goods and services of one country can be traded for goods and services of another country

Nominal exchange rate

Rate at which one currency can be traded for another

Market for loanable funds

Supply of loanable funds from national saving and demand for loanable funds from domestic investment and net capital outflow

Tariff

Tax on imported goods

Purchasing-power parity

Theory that a unit of currency should have the same purchasing power in all countries

Market for foreign-currency exchange

Trade of one currency for another

Net exports (NX)

Value of exports minus value of imports

Trade surplus

When exports exceed imports

Budget deficit

When government spending exceeds government revenue

Trade deficit

When imports exceed exports