Chapter 6

Front 1

Openness in goods market

Back 1

The ability of consumers and firms to choose between domestic goods and foreign goods.

Front 2

Openness in financial markets

Back 2

The ability of financial investors to choose between domestic assets and foreign assets.

Front 3

Openness in fator markets

Back 3

The ability of firms to choose where to locate production, and of workers to choose where to work.

Front 4

Tariffs

Back 4

A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.

Front 5

Tradable goods

Back 5

Goods that compete with foreign goods in either domestic markets or foreign markets. Ex: cars, computers. As opposed to non-tradable goods: most medical services, haircuts, meals at restaurants.

Front 6

Real exchange rate

Back 6

The price of domestic goods relative to foreign goods. It is constructed by multiplying the domestic price level by the nominal exchange rate, and then dividing by the foreign price level.

Greek lower case epsilon =EP/P*

=(€/pound)x(pound/units of UK goods)/€/unit of euro area goods)

=units of euro area goods/units of UK goods

Front 7

Nominal exchange rate

Back 7

The price of the domestic currency in terms of foreign currency. Denoted by E.

(From a UK viewpoint:)

E=1.23 dec 2012

One pound was worth €1.23

Front 8

Appreciation (nominal)

Back 8

An appreciation of the domestic currency is an increase in the price of the domestic currency in terms of a foreign currency. Given our definition of the exchange rate, an appreciation corresponds to an increase in the exchange rate, E. It is a strengthening of the currency.

Front 9

Depreciation (nominal)

Back 9

A depreciation of the domestic currency is a decrease in the price of the domestic currency in terms of a foreign currency. Given our definition of the exchange rate, depreciation of the domestic currency corresponds to a decrease in the exchange rate, E. It is a weakening of the currency.

Front 10

Fixed exchange rate

Back 10

A system in which two or more countries maintain a constant exchange rate between their currencies. In this system, increases in the exchange rate (however infrequent) are called revaluations, and decreases are called devaluations.

Front 11

Real appreciation

Back 11

An increase in the real exchange rate - an increase in the relative price of domestic goods in terms of foreign goods.

Front 12

Real depreciation

Back 12

A decrease in the real exchange rate - a decrease in the relative prices of domestic goods in terms of foreign goods.

Front 13

Bilateral exchange rates

Back 13

Real exchange rate between two countries.*

Front 14

Multilateral exchange rates

Back 14

Reflects the composition of trade with many different countries. *

Front 15

Multilateral real exchange rates

Back 15

By weighing each country by how much each country trades with (ex) the UK, and how much it competes with the UK in other countries, we get a variable called the multilateral real exchange rate, or real exchange rate for short.

Front 16

Foreign exchange

Back 16

Buying or selling foreign currency.

Front 17

Balance of payments

Back 17

A country's transactions with the rest of the world, including both trade flows and financial flows, are summarized in a set of accounts called the balance of payments.

Front 18

Above the line

Back 18

A country's payments to and from the rest of the world, paced above the line in the balance of payments, called the current account transactions.

Front 19

Current account

Back 19

Transactions above the line on a country's balance of payments: imports, exports, trade balance, investment income, investment income paid, net investment income, net transfers received and current account balance.

Front 20

Investment income

Back 20

(In this case) UK residents who hold foreign assets receive investment income. Likewise, foreign residents receive investment income from the UK on their holdings of UK assets.

Front 21

Net transfers received

Back 21

A country's receiving or giving of foreign aid.

Front 22

Current account balance

Back 22

The sum of net payments to and from the rest of the world.

Front 23

Current account surplus

Back 23

If net payment from the rest of the world are positive, the country is running a current account surplus.

Front 24

Current account deficit

Back 24

If the net payment from the rest of the world are negative, the country is running a current account deficit.

Front 25

Capital account transactions

Back 25

Transactions below the line. The net result of public and private international investments flowing in and out of a country.

Front 26

Net capital flows/capital account balance

Back 26

A capital account is a national account that shows the net change in asset ownership for a nation. The capital account is the net result of public and private international investments flowing in and out of a country.* From investopedia

Front 27

Capital account surplus

Back 27

Positive net capital flows.

Front 28

Capital account deficit

Back 28

Negative net capital flows.

Front 29

Statistical discrepancy

Back 29

The difference between current and capital account transactions. A reminder that, even for rich countries, economic data are far from perfect.

Front 30

Gross Domestic Product -GDP

Back 30

A measure that corresponds to value added domestically. It is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation’s overall economic activity.

Front 31

Gross National Product -GNP

Back 31

A measure that corresponds to the value added by domestically owned factors of production. Gross National Product (GNP) is an economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents.

Front 32

Uncovered interest parity relation/interest parity condition

Back 32

Financial investors want to hold only the asset with the highest expected rate of return. If both US and UK bonds are to be held, the expected rate of return for both must be the same according to the uncovered interest parity condition:

Front 33

Capital controls

Back 33

Capital control is any measure taken by a government, central bank or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. This includes taxes, tariffs, outright legislation and volume restrictions, as well as market-based forces.

Front 34

Demand for domestic goods

Back 34

Z=C+I+G-(IM/ε)+X

Some of the demand for domestic goods comes from foreigners, and some from citizens within the country.

Front 35

Domestic demand for goods

Back 35

Z=C+I+G

The demand for goods within a country. Some of this demand will fall on foreign goods, depending on, for example, interest rates and real exchange rates.