Chapter 18: Economics Of An Open Economy

Front 1

Current Account

Back 1

Records a country's net exports.

Front 2

Formula for net exports

Back 2

Sum of the balance of trade and the balance of goods and services.

Front 3

A Frenchman buys a iPod. What account does that affect? Does it increase or decrease?

Back 3

Current account (export of goods). Increases balance. Increases balance of trade. Increases net exports.

Front 4

An American buys a Toyota. What account does that affect? Does it increase or decrease?

Back 4

Current account (import of goods). Decreases balance. Decreases net exports.

Front 5

Balance of trade

Back 5

Difference between the value of the goods a country exports and the value of the goods a country imports.

Front 6

Financial account

Back 6

The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country.

Front 7

Is the purchase of a Chinese bond by an American a capital outflow or inflow?

Back 7

Financial account. Capital outflow.

Front 8

A German buys stock in Ford. Which account does that affect? Is is capital outflow or capital inflow?

Back 8

Financial account. Capital inflow.

Front 9

Net foreign investment

Back 9

The difference between capital outflows and capital inflows.

Front 10

What two components of investment is net foreign investment equal to?

Back 10

Net foreign direct investment plus net foreign portfolio investment.

Front 11

Foreign direct investment

Back 11

Investment in equipment, buildings, etc

Front 12

A German company builds a factory in the US. What type of investment is that? Is it an inflow or an outflow?

Back 12

Direct foreign investment. Capital inflow.

Front 13

Why is the balance of payments always zero?

Back 13

Example: Americans buy foreign goods with dollars. This affects the current account and money flowing out. Those who receive the American dollars use the money to invest in the US, which affects the financial account and the money flows back in. There the net amount of money flowing in and out is always zero.

Front 14

If a country runs a current account surplus, then what must its financial account be?

Back 14

The financial account must be in deficit for exactly the same amount. For example, China has a current account surplus because it exports so much to the rest of the world. This means that it must have a financial account deficit.

Front 15

What does current account = -financial account mean?

Back 15

The current account and the financial account are always opposite. For example, China has a current account surplus because it exports so much to the rest of the world. This means that it must have a financial account deficit because it is investing that money in other countries.

Front 16

What does net exports = net foreign investment mean?

Back 16

The amount of money you get from selling exports equals the amount of money you invest in other countries.

Front 17

What does current account + financial account = 0 mean?

Back 17

The current account and the financial account are always opposite. For example, China has a current account surplus because it exports so much to the rest of the world. This means that it must have a financial account deficit because it is investing that money in other countries.

Front 18

If net exports are negative, then...

Back 18

Net foreign investment must also be negative. More foreign money is being invested into the country than the country is investing in other countries. This is because people must borrow money to pay for the imports.

Front 19

If net exports are positive, then...

Back 19

Net foreign investments must also be positive.

Front 20

What is another name for Net Foreign Investment?

Back 20

Net Capital Outflow (NCO)

Front 21

National Savings will always equal...

Back 21

How much locals are investing in their country plus how much foreigners are investing in their country.This is because

Front 22

National savings will always equal...

Back 22

Domestic investment plus net exports.

Front 23

Explain how this all affects the US and its relationship with China.

Back 23

The US has a negative NCO. This means that it imports more than it exports. It has a positive financial balance account and a negative current account.

Front 24

Net exports equals....

Back 24

The current account balance

Net foreign investment

Net capital outflow

The negative of the financial account balance

Front 25

In the US, are savings less than domestic investment?

Back 25

Yes, savings are less than domestic investment. Therefore, money must flow in from overseas and net foreign investment and net exports are zero.

Front 26

S = I (domestic) + Net Exports can also be written as ______________

Back 26

S = I (domestic) + Net Foreign Investment

Front 27

In China, are savings less than domestic investment?

Back 27

No, China has a surplus of savings which is greater than domestic investment. The excess money flows out of the country because the Chinese invest in other countries. They have a positive NCO and a positive net exports.

Front 28

Formula for real exchange rate

Back 28

NER x (Domestic PL / Foreign PL)

Front 29

Formula for nominal exchange rate (example)

Back 29

1.32 euros per 1 dollar

Front 30

Nominal exchange rate

Back 30

The value of one country's currency in terms of another country's currency

Front 31

Currency appreciation

Back 31

An increase in the market value of one currency relative to another.

Front 32

Currency depreciation

Back 32

a decrease in the market value of one currency relative to another currency.

Front 33

Three sources of foreign currency demand for the US dollar

Back 33

1. Foreign firms and households that want to buy gods and services produced in the US.

2. Foreign firms and households that want to invest in the US, either through foreign direct investment or foreign portfolio investment.

3. Currency traders who believe the value of the dollar in the future will be greater than its value today.

Front 34

When the demand for one currency increases, the the supply of the other currency....

Back 34

Also increases. If demand for the yen increases, then people will trade dollars for yen and the supply of dollars increases.

Front 35

When the demand for one currency decreases, then the supply of the other currency...

Back 35

Also decreases. Holding the other currency becomes more valuable and people will invest the currency.

Front 36

How do gov budget deficits affect investment?

Back 36

Budget deficits decrease the supply of loan-able funds, therefore increasing interest rates. Higher interest rates will discourage investment like building buildings. It will also attract foreign investors. Foreign investors need to buy dollars and the demand for dollars will increase their value. As the dollar appreciates, the cost of American exports will rise and net exports will fall.

Front 37

If Europe suffers a recession, then...

Back 37

The demand for American exports will decrease and the demand for the dollar will decrease.

Front 38

What three accounts make up the balance of payments?

Back 38

Current account, financial account, and the capital account

Front 39

How does the movements in the exchange rate affect exports and imports?

Back 39

When the market value of the dollar rises, the price of US exports rise and the price of foreign goods falls. Net exports decreases. Example, the euro is more expensive than the dollar. The price of French imports are more expensive to US consumers, therefore we export to France more than we import from France.