question

Net Exports (NX)

answer

Exports-Imports. They are equal to trade balance.

question

Trade Surplus

answer

If exports > imports (NX>0)

question

Trade Deficit

answer

If exports < Imports (NX<0)

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Balanced trade

answer

If Exports=Imports

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What effects NX? If U.S. consumers' behavior changes

answer

U.S imports

question

What effects NX? If foreign consumers' behavior changes

answer

U.S exports

question

Case 1. Canada experiences a recession (falling incomes, rising unemployment)

answer

-Canadians buy less of everything including US goods and services. -Canadian imports fall. U.S exports fall -> U.S NX fall

question

Case 2. US consumers decide to be patriotic and buy more products "Made in USA"

answer

-this reduces US purchase of foreign goods -US imports fall ->> US net exports rise

question

Case 3. Prices of goods produces in Mexico rise faster than prices of goods produced in US.

answer

-Mexican goods become more expensive than US goods -US goods become cheaper relative to Mexican goods -US people buy less Mexican goods, Mexican buy more US goods. -Exports rise and imports fall ->> US net exports rise

question

What affects Net Exports?

answer

-the incomes of consumers home and abroad -the tastes of consumers for domestic and foreign goods -government policies toward international trade -the prices of goods at home and abroad -the nominal exchange rates between two countries

question

How would the following transactions affect U.S. exports, imports, and net exports? a. An American art professor spends the summer touring museums in Europe.

answer

-US imports>> US NX falls

question

How would the following transactions affect U.S. exports, imports, and net exports? b.Students in Paris flock to see the latest movie from Hollywood at a theater in Paris.

answer

US exports>> US NX rises

question

How would the following transactions affect U.S. exports, imports, and net exports? c. Your uncle buys a new Volvo (made in Sweden)

answer

US imports>> US NX falls

question

How would the following transactions affect U.S. exports, imports, and net exports? d.A Canadian citizen shops at a store in northern Vermont to avoid Canadian sales tax.

answer

US exports >> US NX rises

question

Net Capital outflow (NCO)

answer

NCO= (Domestic purchase of Foreign assets)-(foreign purchases of Domestic assets) **purchase: buying= positive purchase selling=negative purchase

question

NCO problem 1. A US citizen buys Canadian stocks

answer

-Domestic purchase of foreign assets= increase -US NCO Increases

question

NCO prob 2. A US citizen sells canadian stocks

answer

-Domestic Purchase of Foreign assets decreases -US NCO decreases

question

NCO prob 3. A canadian citizen buys US stocks

answer

-Foreign purchases of Domestic Assets Increases -US NCO decreases

question

NCO Prob 4. A canadian citizen sells US Stocks

answer

-Foreign purchases of Domestic assets decreases -US NCO increases

question

Net capital outflow of US increases if...

answer

-US residents buy foreign assets -foreigners sell US assets (negative Purchase)

question

If NCO> 0

answer

"Capital outflow"

question

If NCO<0

answer

"capital inflow"

question

Physical assets

answer

physical capital: factories, equipment, etc.

question

Financial assets

answer

stocks, bonds, foreign currencies, etc.

question

Foreign Direct Investment (FDI)

answer

-Purchase of physical capital in foreign country -Domestic residents actively manage the foreign investment

question

Example of Foreign Direct investment

answer

Honda expands its factory in Marysville, Ohio

question

Foreign Portfolio Investment (FPI)

answer

-Domestic residents buys foreign stocks, bonds, or currencies. -Foreign physical capital stock rises because FPI supplies loanable funds to foreign firms

question

example of FPI

answer

A Fidelity mutual fund sells its Volkswagen stock to a French Investor

question

FDI

answer

Purchase of physical capital in foreign country

question

FPI

answer

Purchase of foreign stocks, bonds, or currencies

question

Purchase of stocks: Less than 10% share of a firm

answer

FPI

question

Purchase of Stocks: equal to or more than 10% share of a firm

answer

FDI

question

Who is more likely to engage if foreign direct investment- a corporation or an individual investor?

answer

A corporation

question

Who is more likely to invest in a foreign portfolio investment?

answer

An individual investor

question

An American cellular phone company establishes an office in the Czech republic

answer

-FDI -US purchases: US NCO increases

question

Harrods of London sells stock to the General Electric pension fund.

answer

-FPI -Negative foreign purchases of US assets: US NCO rises

question

Honda expands its factory in Marysville, Ohio.

answer

-FDI -Foreign purchase of US assets: NCO falls

question

A fidelity mutual fund sells its Volkswagen stock to a French investor.

answer

-FPI -Negative US purchase of foreign assets: US NCO falls

question

US assets become more attractive.

answer

Foreign assets become less attractive. -both US people and foreigners buy more assets -US NCO falls and foreign NCO rises.

question

US assets become less attractive.

answer

Foreign assets become more attractive. -Both US and foreigners buy more foreign assets. -US NCO rises, foreign NCO falls.

question

case 1. Real interest rates on US assets rise compared to the rates on foreign assets.

answer

NCO falls at home (NCO rises abroad).

question

case 2. The perceived risk of Euro and European assets in general rises compared to the risk level of US assets.

answer

-US NCO decreases. -NCOs for European countries increase

question

case 3. In 1992 South Korea opens it's stock market for foreigners.

answer

-Korean NCO falls Increase in NCO in the US.

question

What affects NCO?

answer

-real interest rates paid on foreign and domestic assets -Perceived risks of holding foreign assets (political and economic stability) -government policies affecting foreign ownership of domestic assets (restriction on asset holding by foreigners.

question

NX=NCO. why?

answer

-Because every movement of goods and service, there is movement of money for the corresponding transaction. -this is an accounting identity (always true)

question

Example: Ford keeps 20,000 euros.

answer

-US holding euro increases (US NCO UP by 20,000 euro)

question

Example: Ford buys European stocks worth 20,000 euros.

answer

-US holding of European stocks increases. -(US NCO up by 20,000 euros)

question

Example: Ford exchanges 20,000 euros for USD at a US bank

answer

-US holding of Euro increases, now the bank holds it. (US NCO UP by 20,000 euro)

question

Example: Ford exchanges 20,000 euros for USD at a European Bank

answer

-Europe's holding of USD decreases (worth 20,000) (US NCO UP by 20,000)

question

An American buys a Sony TV from Japan, pays with USD.

answer

-US imports. NX decrease -NCO must decrease

question

An American buys a share of Sony stock, pays with USD

answer

-no goods and services transaction. NX unchanged. -NCO must remain unchanged as well.

question

The Sony pension fund buys bonds from the US treasury and pays with Japanese Yen

answer

-NX unchanged (no goods and services) -NCO must be unchanged too.

question

A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer using Japanese Yen

answer

-NX increase -NCO must increase

question

S-I =???

answer

NCO

question

What does the "S" stand for in S-I=NCO?

answer

Domestic supply of loanable funds

question

What does the "I" stand for in S-I=NCO

answer

Domestic demand for loanable funds.

question

T/F: A country with negative net exports has a trade surplus

answer

False: it has a trade deficit

question

T/F: Net capital outflow is foreign purchase of domestic assets minus the our purchase of the foreign assets.

answer

False: the opposite

question

T/F: If a country's net exports fall, then its net capital outflow rises

answer

False: NX=NCO. They move together

question

T/F: In an open economy, national savings can be less than the investment.

answer

True! S= I+NCO, so S<I if NCO is negative.

question

Nominal Exchange Rate

answer

the rate at which one country's currency trades for another

question

Appreciation

answer

An increase in the value of a currency. "strengthening"

question

Depreciation

answer

a decrease in the value of a currency "weakening"

question

Devaluation

answer

deliberate lowering of the value of a currency through currency market intervention.

question

Real exchange rate

answer

The rate at which the goods and services of one country trade for those of another.

question

Real exchange rate (equation)

answer

E= eP/P*

question

e:

answer

Nominal exchange rate written as the amount of foreign currency per unit of domestic currency.

question

P=

answer

domestic price index

question

P*=

answer

foreign price index

question

The US nominal exchange rate is unchanged, but prices rise faster in the US than abroad

answer

-US RER rises. US goods and services become more expensive.

question

The US nominal Exchange rate is unchanged, but prices rise faster abroad than in the US.

answer

US RER falls. US goods and services become cheaper.

question

The US nominal exchange rate declines, and prices are unchanged in the US and abroad.

answer

-US RER falls. US goods and services become cheaper.

question

The US nominal exchange rate declines, and prices rise faster abroad than in the US.

answer

US RER falls. US goods and services become cheaper.

question

Law of one Price

answer

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

question

Ensured by arbitrage:

answer

If prices are different in two locations, one can always make profit by buying the good at cheaper location and sell it at more expensive location.

question

Higher domestic inflation

answer

lowers the value of domestic currency

question

Higher foreign Inflation

answer

raises the value of domestic currency (reduces the value of foreign currency)

question

If two countries have different inflation rates:

answer

the nominal exchange rate will change over time

question

If inflation is higher in Mexico than in the US

answer

-P* rises faster than P -e rises -US dollar appreciates against the peso

question

If inflation is higher in the US than in Mexico

answer

-P rises faster than P* -e falls -US dollar depreciates against the peso

question

Example of non- traceable goods

answer

-haircuts -cannot be arbitraged, so law of one price does not apply

question

Foreign and domestic goods are not perfect substitutes

answer

-Italian vs. Chinese shirts -even the corolla in Japan and the US are not perfect substitutes/

question

T/F: PPP is rather a long-run phenomenon

answer

True

question

T/F: If the exchange rate is 10 pesos per US dollar, it is also 1/10 US dollars per peso.

answer

True

question

T/F: The theory of purchasing-power parity states that a unit of a country's currency should be able to buy the same quantity of goods in foreign countries as it does domestically.

answer

True

question

T/F: If prices in the US rise faster than prices in the UK, then according to the doctrine pf purchasing-power parity the US nominal exchange rate should fall.

answer

True

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