Eco 202 Exam 2 Part 2

Front 1

Net exports are also called

Back 1

trade balance

Front 2

Trade surplus

Back 2

an excess of exports over imports

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Trade deficit

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an excess of imports over exports

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Balanced trade

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exports=imports

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Factors that influence a country

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-consumer tastes
-prices at home and abroad
-exhcnage rates at which people canuse domestic currency to buy foreign currencies
-incomes of consumers
-cost of transporting goods
-government policies toward international trade

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Reasons for the increase in international trade

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-improvements for transportation
-advances in telecommunications
-technological progress
-trade policies such as NAFTA

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purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

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Net Capital Outflow

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When NCO is positive..

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domestic residents are buying more foreign assets than foreigners are buying domestic assets

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When NCO is egative,

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domestic residents are buying less forieng assets than foreigners are buying domestic assets

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Factors that infleunce NCO

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-Real interest rates paid on foreign and domestic assets
-perceived economica and political risks of holding assets abroad
-government policies that affect foreign ownership of domestic assets

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Trade Surplus

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Exports>imports
Net exports>0
Y>C+I+G
Saving>Investment
Net Capital Outflow>0

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the rate at which a person can trade the currency of one country for the currency of another

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nominal exchange rate

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an increase in the value of currency as measured by the amount of foreign currency it can buy

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appreciation

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decrease 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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rate at which a person can trade the goods and services of one country for the goods and services of another

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real exchange rate

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Real exchange rate =

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(Nominal exchange rate*Domestic Price)/Foreign Price

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Depreciation (fall) in the U.S real exchange rate

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consumers at home and abroad buy more U.S goods and fewer goods from other countries

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Appreciation (rise) in the U.S real exchange rate

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Consumers at home and abroad buy fewer U.S goods and more goods from other countries

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Purchasing Power Parity

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theory of exchange rates wherby a unit of any given currency should be able to buy the same quantity of goods in all countries

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Law of one price

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assert a good must sell for the same price in all locations (1/P)=(e/P*)

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if the purchasing power of the dollar is always the same at home and abroad..The

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then the real exchange rate (the realtive price of domestic and foreign goods) cannot change

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Hyperinflaiton

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high inflation that arises when a government turns to the printing press to pay for large amounts of government spending

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Limitations of Purchasing Power-Parity

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-Many goods are not easily traded
-even tradable goods are not always perfect substtituees when they are produced in different countries
-because of these reasons, real exchange rates flucuate over time

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coordinates the economy's saving,investment, and flow of loanable funds abroad. There is only one intereset rate, which is both the return on saving and the cost of borrowing

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Market for loanable funds

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Supply of loanable funds comes from

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national saving (S)

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Demand for loanable funds comes from

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Domestic investment (I) and net capital outflow (NCO)

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The y-axis for market for loanable funds is

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the real interest rate, r

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Higher interest rate..

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encourages people to save and raises the quantity of loanable funds supplied. Makes borrowing to finance capital projects more costly; discouraging domestic investment and reduces the quantity of loanable funds demanded

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Trade U.S dollars in exchange for foreign currencies

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market for foreign-currency exchange

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Supply curve is..

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vertical because the quantity of dollars supplied for net capital outflow does not depend on the real exchange rate

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Demand curve is..

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net exports

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On the y-axis..

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is the real exchange rate which is the price of domestic goods and services relative to foreign goods and serviecs

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An appreciation of the real exchange rate..

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reduces the quantityof dollars demanded in the market for foreign-currency excahnge and makes U.S goods more expesnsive

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Net capital outlflow is the variable that..

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connects the market for loanable funds and the market for foreign currecny exchange

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Effects on a government budget deficit in the enocomy

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-Supply curve shifts to the left in the market for loanable funds
-raises real interest rates, crowds out domestic investment, causes the currency to appreciate, reduces the net capital outflow, reduces the supply of dollars in the market for foreign-currency exchange, and pushes the trade balance towards a trade deficit

Front 36

Trade policy

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government policy that directly influences the quantity of goods and services that a a country imports or exports

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Tariff

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a tax on imported goods

Front 38

import quota

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a limit on the quantity of a good produced abraod that can be sold odomestically

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Trade policies

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DO NOT AFFECT TRADE BALANCE
-does not alter national saving or domestic invesment

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a large and sudden reduction in the demand for assets located in a country

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Capital Flight

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Capital flight..

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increases interest rates and causes the currency to depreciate