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73 Cards in this Set

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An increase in the value of a currency as measured by the amount of foreign currency it can buy:
appreciation
A situation in which exports equal imports:
balanced trade
An excess of imports over exports:
trade deficit
The value of a nation’s exports minus the value of its imports; also called the trade balance:
net exports
An economy that does not interact with other economies in the world:
closed economy
The rate at which a person can trade the currency of one country for the currency of another:
nominal exchange rate
An excess of exports over imports:
trade surplus
Goods and services that are produced abroad and sold domestically:
imports
The value of a nation’s exports minus the value of its imports; also called net exports:
trade balance
A theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries:
purchasing-power parity
The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners:
net capital outflow
An economy that interacts freely with other economies around the world:
open economy
The rate at which a person can trade the goods and services of one country for the goods and services of another:
real exchange rate
A decrease in the value of a currency as measured by the amount of foreign currency it can buy:
depreciation
Goods and services that are produced domestically and sold abroad:
exports
Another name given to Net Exports is:
Trade balance
According to the Purchasing Power Parity Theory, the ________ exchange rate tends to become equal to the Purchasing Power Parity, and the ________ exchange rate tends to become equal to ________.
nominal, real, one
What will happen to our net capital outflow if there is political or economic turmoil in the U.S.?
Our net capital outflow will INCREASE.
What happens to net exports when domestic incomes rise?
Net exports DECREASE
What does it mean when net capital outflow is positive?
It means that domestic residents are spending more on foreign assets than foreigners are spending on domestic assets.
If the U.S. has a trade deficit, it means that:
Saving in the U.S. is less than investment.
What effect will there be on the U.S. if real interest rates increase abroad?
U.S. net capital outflow will INCREASE.
If prices in country A are the same as prices in country B, it means that the ________ exchange rate between these countries is equal to ________.
real, one
According to the Purchasing Power Parity Theory, if prices are lower in the U.S. than abroad, traders will ________, which will cause the dollar to ________.
buy in the U.S. and sell abroad, appreciate
If the nominal exchange rate goes from 100 to 120 yen per dollar, has the dollar appreciated or depreciated?
The dollar has APPRECIATED because a dollar now buys more yen.
How would this transaction affect U.S. exports, imports, & net exports?

"An American art professor spend the summer touring museums in Europe."
EFFECT: He spends money buying foreign goods & services.

U.S. EXPORTS: unchanged
U.S. IMPORTS: increase
NET EXPORTS: decrease
Would this transaction be included in net exports or net capital outflow? (increase/decrease)

"The Sony pension fund buys a U.S. Treasury bond."
NET CAPITAL OUTFLOW decreases
How would this transaction affect U.S. exports, imports, & net exports?

"A Canadian citizen shops at a store in northern Vermont to avoid Canadian sales tax."
EFFECT: A foreigners is buying U.S. goods.

U.S. EXPORTS: increase
U.S. IMPORTS: unchanged
NET EXPORTS: increase
Over the past 20 years, Spain has had high inflation, and Japan has had low inflation.

What has happened to the number of Spanish pesetas a person can buy w/ a Japanese yen?
Because Spain has had high inflation and Japan has had low inflation, the number of Spanish pesetas a person can buy w/ Japanese yen has INCREASED.
Would this transaction be included in net exports or net capital outflow? (increase/decrease)

"An American buys a Sony TV."
NET EXPORTS decrease
How would this transaction affect U.S. exports, imports, & net exports?

"The student bookstore at Oxford University sells pairs of Levi's jeans."
EFFECT: Foreigners are buying U.S. goods.

U.S. EXPORTS: increase
U.S. IMPORTS: unchanged
NET EXPORTS: increase
Who is more likely to engage in foreign direct investment - a corporation or an individual investor?
Foreign direct investment requires actively managing an investment, such as opening a retail store in a foreign country.

A CORPORATION is more likely to enage in foreign direct investment.
Would this transaction be included in net exports or net capital outflow? (increase/decrease)

"A Japanese tourist buys some Georgia peaches from a U.S. farmer."
NET EXPORTS increase
How would this transaction affect U.S. exports, imports, & net exports?

"Students in Paris flock to see the latest movie from Hollywood."
EFFECT: The foreign students buy a U.S. good.

U.S. EXPORTS: increase
U.S. IMPORTS: unchanged
NET EXPORTS: increase
What is the economic logic behind the theory of purchasing-power parity?
A good must sell for the same price in all locations. Otherwise, people would profit by engaging in arbitrage.
Would this transaction be included in net exports or net capital outflow? (increase/decrease)

"An American buys a share of stock in Sony."
NET CAPITAL OUTFLOW increases.
If the Fed started printing large quantities of U.S. dollars, what would happen to the number of Japanese yen a dollar could buy?
The U.S. price level would increase, and a dollar would buy fewer Japanese yen.
How would this transaction affect U.S. exports, imports, & net exports?

"Your uncle buys a new BMW."
EFFECT: An American is buying a foreign good.

U.S. EXPORTS: unchanged
U.S. IMPORTS: increase
NET EXPORTS: decrease
Who is more likely to engage in foreign portfolio investment - a corporation or an individual investor?
Foreign portfolio investment is passive, such as buying corporate stock in a retail chain in a foreign country.

An INDIVIDUAL INVESTOR is more likely to engage in foreign portfolio investment.
How would this transaction affect U.S. net capital outflow? (direct/portfolio investment)

"An American cellular phone company establishes an office in the Czech Republic."
U.S. net capital outflow INCREASES b/c the U.S. company made a DIRECT INVESTMENT in capital in a foreign country.
Would U.S. manufacturing industries be happy or unhappy if the U.S. dollar appreciated?
UNHAPPY - b/c their prices would be higher in terms of foreign currencies, which will reduce their sales.
Does your newspaper show nominal or real exchange rates?
It shows NOMINAL EXCHANGE RATES, b/c it has the # of units of one currency that can be exchanged for another currency.
How would this transaction affect U.S. net capital outflow? (direct/portfolio investment)

"A Fidelity mutual fund sells its Volkswagen stock to a French investor."
U.S. net capital outflow DECREASES (if the French investor pays in U.S. dollars) b/c the U.S. company is reducing its PORTFOLIO INVESTMENT in a foreign country.
Would this group be happy or unhappy if the U.S. dollar appreciated?

"Dutch pension funds holding U.S. government bonds."
Dutch pension funds holding U.S. government bonds would be HAPPY if the U.S. dollar appreciated.

WHY? They would get more Dutch guilders for each dollar they earned on their U.S. investment.
Explain what is happening to the U.S. real exchange rate in the following situation.

"The U.S. nominal exchange rate is unchanged, but prices rise faster in the U.S. than abroad."
The U.S. real exchange rate INCREASES.
How would this transaction affect U.S. net capital outflow? (direct/portfolio investment)

"Harrod's of London sells stock to the General Electric pension fund."
U.S. net capital outflow INCREASES b/c the U.S. company made a PORTFOLIO INVESTMENT in a foreign country.
If U.S. inflation exceeds Japanese inflation over the next year, would you expect the U.S. dollar to appreciate or depreciate relative to the Japanese yen?
The U.S. dollar would DEPRECIATE relative to the Japanese yen b/c a dollar would decline in value (in terms of the goods/services it can buy) more than the yen would.
Suppose you have an investment in a foreign country. Are you be better off if that country's currency depreciates or appreciates?
APPRECIATES
How would this transaction affect U.S. net capital outflow? (direct/portfolio investment)

"BMW expands its factory in Cleveland, Ohio."
U.S. net capital outflow DECREASES b/c a foreign company made a DIRECT INVESTMENT in capital in the U.S.
Would a group of Australian tourists planning a trip to the United States be happy or unhappy if the U.S. dollar appreciated?
UNHAPPY - b/c the tourists would get fewer U.S. dollars for each Australian dollar, so their vacation would be more expensive.
Why has international trade in wheat increased over the past few years?
Because shipping costs and trade restrictions have declined.
Explain what is happening to the U.S. real exchange rate in the following situation:

"The U.S. nominal exchange rate is unchanged, but prices rise faster abroad than in the United States."
The U.S. real exchange rate DECLINES.
Would an American firm trying to purchase property overseas be happy or unhappy if the U.S. dollar appreciated?
HAPPY - b/c it would get more units of the foreign currency so the U.S. firm could buy more property overseas.
Holding national saving constant, what effect would an increase in net capital outflow have on a country's accumulation of domestic capital?
Domestic investment must DECREASE, thus making the country's accumulation of domestic capital decline.

WHY? National saving = (Domestic investment + Net capital outflow)
Why has international trade in banking services increased over the past few years?
Because communications costs and trade restrictions have declined.
Explain what is happening to the U.S. real exchange rate in the following situation:

"The U.S. nominal exchange rate is declining, and prices are unchanged in the United States and abroad."
The U.S. real exchange rate DECLINES.
What is the most accurate measure of the international value of the dollar?
An exchange rate index that accounts for many exchange rates.
When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive:
Arbitrage
A closed economy has no ____, ____, or ____.
exports, imports, capital flows
Net exports are also known as what?
The TRADE BALANCE
What happens to U.S. net capital outflow when a U.S. resident buys stock in Telmex, a Mexican phone company?
The purchase INCREASES U.S. net capital outflow.
What is the theory of purchasing-power parity based on?
The LAW OF ONE PRICE principle.
An open economy interacts w/ other countries in what 2 ways?
1) It buys and sells goods and services in world product markets.
2) It buys and sells capital assets in world financial markets.
According to the law of one price, a good must sell for how much?
A good must sell for the same price in ALL locations.
What happens to U.S. net capital outflow when a Japanese resident buys a bond issued by the U.S. government?
The purchase REDUCES U.S. net capital outflow.
What is the simplest and most widely accepted theory explaining the variation of currency exchange rates?
The purchasing-power parity theory
If ______ did not hold true, unexploited profit opportunities would exist.
The law of one price
The purchasing-power parity theory is the simplest and most widely accepted theory explaining the variation of ______:
Currency exchange rates
What are the 2 most important international prices?
The nominal exchange rate and the real exchange rate.
What is a key determinant of how much a country exports and imports?
The real exchange rate
What would exist if the law of one price were not true?
Unexploited profit opportunities.
What are some limitations/disadvantages of purchasing-power parity?
1) Many goods are not easily traded or shipped from one country to another.
2) Tradable goods are not always perfect substitutes when they are produced in different countries.
If the U.S. saves $1,000 billion and U.S. net capital outflow is -$200 billion, what is U.S. domestic investment?
Domestic investment = Saving – Net capital outflow
I = S – NCO

I = 1,000 – (-200)
= $1,200 billion