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34 Cards in this Set
- Front
- Back
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exports |
products/services produced domestically and sold abroad |
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imports |
goods/services produced abroad and sold domestically |
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net exports |
exports minus imports |
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trade surplus |
an excess of exports over imports |
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trade defecit |
an excess of imports over exports |
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factors that influence a country's imports, exports, and net exports |
tastes of consumers price of goods & services at home and abroad exchange rates incomes at home and abroad transportation costs government policies |
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net capital outflow (NCO) |
the purchase of foreign assets by domestic residents (minus) purchases of domestic assets by foreigners |
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If a US citizen purchases Mexican stock, what does that do to US NCO? |
increases US NCO (+1 for domestic purchaser of a foreign asset - +0 for foreign purchaser of domestic asset) |
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If a Mexican buys US stock, what does that do to US NCO? |
decreases US NCO (+0 for domestic purchaser of a foreign asset - +1 for foreign purchaser of domestic asset) |
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When NCO is (+) positive, what does that mean? |
domestic residents are buying more foreign assets than foreigners are buying domestic assets |
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When NCO is (-) negative, what does that mean? |
domestic residents are buying less foreign assets than foreigners are buying domestic assets |
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What is a negative outflow? |
an inflow of money |
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What influences NCO? |
Real interest rate If Real interest rate increases, demand for US bonds increases, which decreases NCO. If real interest rate increases, demand for foreign bonds increases, and NCO increases. |
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What influences NCO? |
preceived economic and political risks of holding assets abroad |
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What influences NCO? |
government policies |
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NCO=NX |
every transaction that affects one side of the equation affects the other side by the same amount |
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NX>0 |
US is selling more goods and services to foreigners than it is buying them |
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NX>0 |
using currency earned from selling to foreigners to buy foreign assets |
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NX<0 |
nation is in a trade deficit. Buying more goods and services from foreigners than it is selling to them and financing net purchases by selling assets abroad. |
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S=I+NCO S=I+NX |
when US citizens save a dollar of their income for the future, that money can be used to finance accumulation of domestic capital of foreign investment abroad |
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Nominal exchange rate |
the rate at which a person can exchange the currency of one country for the currency of another |
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appreciation |
an increase in the value of a currency as measure by the amount of foreign currency it can buy
$1= 1 Euro $1=1.5 Euro
Dollar appreciates |
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depreciation |
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
$1=1 Euro $1.5=1 Euro
Dollar depreciates |
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real exchange rate |
the rate at which a person can trade the goods and services of one country for the goods/services of another |
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Equation for real exchange rate |
Nominal exchange rate * (times) domestic price / (divided by) foreign price |
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what is real exchange rate a key determinant of? |
how much a country exports and imports |
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What happens to American producers and consumers when the dollar strengthens? |
Consumers are better off and producers are worse off |
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What system is used for exchange rates |
floating exchange rate, currencies adjust based on supply and demand for currencies |
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purchasing power parity |
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods/services in all countries |
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Law of one price |
a product should be the same price everywhere and the only difference should be the exchange rate |
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when a central bank prints large quantities of money, what happens to that money? |
that money loses purchasing power in terms of goods and services and the amount of foreign currency it can buy |
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what are some limitations of the purchasing power parity? |
Not many goods are easily traded even tradable goods are not perfect substitutes |
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example of a foreign direct investment |
McDonald's opens up a restaurant in Russia |
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example of a foreign portfolio investment |
American buys stock in a Russian corporation |
