Chapter 7

Front 1

Demand for domestic goods

Back 1

ZZ - Demand for goods produced within the country. Some of the demand for domestic goods comes from foreign countries, some comes from within the country. The difference between DD and ZZ is equal to the trade deficit. ZZ is influenced by both domestic and foreign output.

Front 2

Domestic demand for goods

Back 2

DD - a function of income: C+I+G. Corresponds to the demand function in a closed economy. DD is steeper than ZZ (demand for domestic goods) because the multiplier is bigger in a closed economy. The difference between DD and ZZ is equal to the trade deficit.

Front 3

Marshall-Lerner condition

Back 3

The condition under which a real depreciation - a decrease in ε - leads to an increase in net exports, NX. Satisfied in reality. This happens after a real depreciation:

- import bill increases, because of slow adjustment to raising prices, and because we still have to import x number of goods and services.

- exports, X, increase, because domestic currency is worth less, thus foreign countries can get our goods cheaper

- imports, IM, decrease, because it is more expensive to buy foreign goods

The two latter incidents trumps the first, thus net exports will increase. (A positive change in the trade balance)

Front 4

J-curve

Back 4

A real depreciation leads initially to a deterioration of the trade balance due to dynamics and lagging in the changes in exports and imports. Then it will lead to an improvement of the trade balance. The shape of the curve showing this lagging can look like the letter J.

Front 5

Flexible exchange rates

Back 5

Countries with a flexible exchange rate, such as USA, Sweden and Japan, have shown themselves to be quite willing to let their exchange rates fluctuate considerably.

Front 6

Fixed exchange rates

Back 6

Countries that maintain a fixed exchange rate in terms of some foreign policy. Some "peg" their currency to the dollar because it is a much stronger currency, than theirs. E. g. Argentina pegged its currency to the dollar: 1 peso=1$

Front 7

Devaluation

Back 7

A decrease in the exchange rate under a regime of fixed exchange rates - similar to a depreciation. This happens far more rarely than a depreciation.

Front 8

Depreciation

Back 8

Weakening of the currency. Decrease in interest rate, i, and exchange rate, E.

Front 9

Revaluation

Back 9

An increase in the exchange rate under the regime of fixed exchange rates. Similar to an appreciation, but far more rare.

Front 10

Appreciation

Back 10

Strengthening of the currency. Increase in interest rate, i, and exchange rate, E.