Econ exam 3 Ch. 13 – Flashcards
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the dollar is said to appreciate against the euro if...
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the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods.
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A Japanese bank buys U.S. government bonds, this purchase...
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decreases U.S. net capital outflow, but increases Japanese net capital outflow.
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If the Canadian nominal exchange rate does not change, but prices rise faster abroad than in Canada, then the Canadian real exchange rate...
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declines.
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Other things the same, if a country has a trade deficit and saving rises,
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net capital outflow rises, so the trade deficit decreases.
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Net capital outflow equals the difference between a country's
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purchases of foreign assets and sales of domestic assets abroad.
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Consider an identical basket of goods in both the U.S. and Taiwan. For a given nominal exchange rate, in which case is it certain that the U.S. real exchange rate with Taiwan falls?
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the price of the basket of goods falls in the U.S. and rises in Taiwan
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The theory of purchasing-power parity primarily explains
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the determination of the real exchange rate.
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the law of one prices states that
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a good must sell at the same price at all locations.
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If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as
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e(P/P*)
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If saving is greater than domestic investment, then
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there is a trade surplus and Y > C + I + G.
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The nominal exchange rate is the
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rate at which a person can trade the currency of one country for another.
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an open economy's GDP is given as
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Y = C + I + G + NX
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A U.S. retailer buys shoes from an Italian company. The Italian firm then uses all of the revenues to buy leather from the U.S. These transactions
a. increase both U.S. net exports and U.S. net capital outflow.
b. decrease both U.S. net exports and U.S. net capital outflow.
c. increase U.S. net exports and do not affect U.S. net capital outflow.
d. None of the above is correct.
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D
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When the Mexican peso gets "stronger" relative to the dollar,
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the U.S. trade deficit with Mexico falls
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A pair of running shoes costs $70 in the U.S. If the price of the same shoes is 4500 rupees in India and the exchange rate is 60 rupees per dollar, than the real exchange rate is
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less than 1, so a profit could be made by buying these shoes in the U.S. and selling them in India.
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If a dollar buys more corn in the U.S. than in Mexico, then
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the real exchange rate is less than 1; a profit might be made by buying corn in the U.S. and selling it in Mexico.
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Other things the same, if the U.S. real exchange rate appreciates, U.S. net exports
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and U.S. net capital outflow both decrease.
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A Finnish corporation builds a factory the produces ceiling fans in the United States. This is an example of Finish
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foreign direct investment that increases Finnish net capital outflow
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A British grocery chain uses previously obtained U.S. dollars to purchase oranges from the United States. This transaction
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decreases British net capital outflow, and increases U.S. net exports.
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A country has a trade deficit
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its net capital outflow must be negative and saving is smaller than investment.
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If the real exchange rate is greater than 1, then the
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nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in the U.S. would buy more then enough foreign currency to buy the same good overseas.
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trade surplus
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excess of exports over imports
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trade deficit
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if net exports are negative
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Factors that influence NX, exports, and imports
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tastes of consumers, prices home v. abroad, exchange rates, incomes, transportation costs, government trade policies
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these two agreements have lowered tariffs, import quotas, and other trade barriers
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NAFTA (north america free trade agreement)
GATT (general agreement on tariffs and trade)
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Net Capital outflow
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difference between purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners
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these both increase Net capital outflow
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foreign direct investment/ foreign portfolio investment
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When NCO is negative...
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there is capital inflow
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factors that influence net capital outflow
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real interest rates paid on foreign v. domestic assets, perceived economic/political risks of holding assets abroad, government policies that affect foreign ownership of domestic assets
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NCO =
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NX
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if NX > 0,
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must be using foreign currency to buy foreign assets, NCO > 0, capital outflow
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if NX < 0,
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must be selling assets abroad to finance purchases, NCO < 0, capital inflow
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formula for national saving
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S = Y - C - G
Y - C - G = I + NX
S = I + NX
S = I + NCO
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the two uses for saving in an open economy
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domestic investment and net capital outflow
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Trade deficit traits
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exports < imports
NX < 0
Y < C + I + G
saving < investment
NCO < 0
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Balanced trade traits
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exports = imports
NX = 0
Y = C + I + G
Saving = Investment
NCO = 0
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Trades surplus traits
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exports > imports
NX > 0
Y > C + I + G
Saving > Investment
NCO > 0
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the nominal exchange rate is expressed as...
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units of foreign currency per U.S. dollar
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Appreciation
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an increase in the value of a currency as measured by the amount of foreign currency it can buy
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Depreciation
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a decrease in the value of a currency as measured by amount of foreign currency it can buy
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Real exchange rate
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the rate at which a person can trade the goods + services of one country for the goods + services of another
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Real exchange rate =
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((nominal exchange rate)(domestic price)) / foreign price
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(e * p) / p*
where e is N.E.R., P is U.S. CPI, P* is foreign price level
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Purchasing power parity
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a theory of exchange rates where a unit of any given currency should be able to buy the same quantity of goods in all countries. based on the "law of one price"
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Arbitrage
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process of taking advantage of price differences of the same item in different markets
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For the purchasing power of a dollar to be the same in 2 countries... this formula is needed
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1/p = e/p*
where p in price of basket of goods in the U.S. dollars, e is N.E.R., P* is price of a basket in foreign currency
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1 = eP/P*
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If the purchasing power of the dollar is always the same at home and abroad,
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then the real exchange rate cannot change.
e = p*/p
