Ec 250 - Chapter 5

Front 1

Open versus closed economies

Back 1

Open economy: An economy in which households, firms, and governmentsborrow, lend, and trade internationally.

Closed economy: An economy in which households, firms, and governments donot borrow, lend or trade internationally.

Front 2

Balance of payments

Back 2

A record of a country’s trade with other countries in goods,services, and assets.

Front 3

Current account and financial account

Back 3

Current account: Thepart of the balance of payments that records a country’s net exports, netfactor payments, and net transfers.

Financial account: Thepart of the balance of payments that records purchases of assets a country hasmade abroad and foreign purchases of assets in the country.

Front 4

Foreign direct investment and foreign portfolio investment

Back 4

Foreign directinvestment: Investment into production or firms by foreigners, either bysetting up or expanding firms or by purchasing companies.

Foreign portfolioinvestment: The purchase of financial assets, such as stocks or bonds, byforeigners.

Front 5

Nominal exchange rate

Back 5

The price of one country’s currency in terms of anothercountry’s currency (for this course, it is the amount of a foreign currencyrequired to purchase one CAD).

Front 6

Spot exchange rate

Back 6

The current price of one country’s currency for anothercurrency, for immediate exchange.

Front 7

Currency appreciation and depreciation

Back 7

Currencyappreciation: An increase in the market value of one country’s currencyrelative to another country’s currency when the exchange rate is flexible.

Currencydepreciation: A decrease in the market’s value of one country’s currency,when the exchange rate is flexible.

Front 8

Forward exchange rate

Back 8

The exchange rate used to exchange currencies in the future.

Front 9

Multilateral exchange rate

Back 9

An index in which the value of the currency is measuredagainst the average of the country’s main trading partners; for Canada, it iscalled the Canadian Dollar Effective Exchange Rate Index, CERI.

Front 10

Real exchange rate

Back 10

The rate at which goods and services in one country can beexchanged for goods and services in another country.

Front 11

The Big Mac index

Back 11

An index which illustrates the real exchange with a single good.

Front 12

Fixed versus floating versus managed exchange rate systems

Back 12

Fixedexchange rate system: A system in which exchange rates are set at levelsdetermined and maintained by government or central bank.

Floatingexchange rate system: A system in which the foreign exchange value ofcurrency is determined in the foreign exchange market.

Managedfloating rate system: A system in which private buyers and sellers in the foreignexchange market determines the value of currencies most of the time, withoccasional central bank intervention.

Front 13

Currency revaluation and devaluation

Back 13

Currency revaluation:An increase in the market value of one country’s currency relative toanother country’s currency when the exchange rate is fixed.

Currency devaluation:A decrease in the market value of one country’s currency relative to anothercountry’s currency when the exchange rate is fixed.

Front 14

Law of one price

Back 14

The notion that identical products should sell for the sameprice everywhere, including in different countries, as long as they are freelytradeable.

Front 15

Arbitrage

Back 15

Taking advantage of price differences across markets bybuying a product in one market and reselling it in another market at a higherprice.

Front 16

Purchasing power parity (PPP)

Back 16

The theory that, in the long run, nominal exchange ratesadjust to equalize the purchasing power of different currencies.

Front 17

Small versus large open economies

Back 17

Small open economy: An economy whose domestic real interest rate equals the world real interest rate, as determined by the international capital market, and whose quantity of loanable funds supplied or demanded is too small to affect the real world interest rate.

Large open economy: An economy whose domestic real interest rate greatly affects the world real interest rate, and whose quantity of loanable funds supplied or demanded is too small to affect the real world interest rate.