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41 Cards in this Set

  • Front
  • Back
Net exports are also called
trade balance
Trade surplus
an excess of exports over imports
Trade deficit
an excess of imports over exports
Balanced trade
exports=imports
Factors that influence a country
-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
Reasons for the increase in international trade
-improvements for transportation
-advances in telecommunications
-technological progress
-trade policies such as NAFTA
purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Net Capital Outflow
When NCO is positive..
domestic residents are buying more foreign assets than foreigners are buying domestic assets
When NCO is egative,
domestic residents are buying less forieng assets than foreigners are buying domestic assets
Factors that infleunce NCO
-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
Trade Surplus
Exports>imports
Net exports>0
Y>C+I+G
Saving>Investment
Net Capital Outflow>0
the rate at which a person can trade the currency of one country for the currency of another
nominal exchange rate
an increase in the value of currency as measured by the amount of foreign currency it can buy
appreciation
decrease in the value of a currency as measured by the amount of foreign currency it can buy
depreciation
rate at which a person can trade the goods and services of one country for the goods and services of another
real exchange rate
Real exchange rate =
(Nominal exchange rate*Domestic Price)/Foreign Price
Depreciation (fall) in the U.S real exchange rate
consumers at home and abroad buy more U.S goods and fewer goods from other countries
Appreciation (rise) in the U.S real exchange rate
Consumers at home and abroad buy fewer U.S goods and more goods from other countries
Purchasing Power Parity
theory of exchange rates wherby a unit of any given currency should be able to buy the same quantity of goods in all countries
Law of one price
assert a good must sell for the same price in all locations (1/P)=(e/P*)
if the purchasing power of the dollar is always the same at home and abroad..The
then the real exchange rate (the realtive price of domestic and foreign goods) cannot change
Hyperinflaiton
high inflation that arises when a government turns to the printing press to pay for large amounts of government spending
Limitations of Purchasing Power-Parity
-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
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
Market for loanable funds
Supply of loanable funds comes from
national saving (S)
Demand for loanable funds comes from
Domestic investment (I) and net capital outflow (NCO)
The y-axis for market for loanable funds is
the real interest rate, r
Higher interest rate..
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
Trade U.S dollars in exchange for foreign currencies
market for foreign-currency exchange
Supply curve is..
vertical because the quantity of dollars supplied for net capital outflow does not depend on the real exchange rate
Demand curve is..
net exports
On the y-axis..
is the real exchange rate which is the price of domestic goods and services relative to foreign goods and serviecs
An appreciation of the real exchange rate..
reduces the quantityof dollars demanded in the market for foreign-currency excahnge and makes U.S goods more expesnsive
Net capital outlflow is the variable that..
connects the market for loanable funds and the market for foreign currecny exchange
Effects on a government budget deficit in the enocomy
-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
Trade policy
government policy that directly influences the quantity of goods and services that a a country imports or exports
Tariff
a tax on imported goods
import quota
a limit on the quantity of a good produced abraod that can be sold odomestically
Trade policies
DO NOT AFFECT TRADE BALANCE
-does not alter national saving or domestic invesment
a large and sudden reduction in the demand for assets located in a country
Capital Flight
Capital flight..
increases interest rates and causes the currency to depreciate