Open-economy macroeconomics: basic concepts
Terms in this set (55)
an economy that does not interact with other economies in the world
an economy that interacts freely with other economies around the world
goods and services that are produced domestically and sold abroad
goods and services that are produced abroad and sold domestically
the value of a nation's exports minus the value of its imports; also called the trade balance
an excess of exports over imports
an excess of imports over exports
a situation in which exports equal imports
net capital outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
saving is equal
I + NCO (Domestic investment + Net capital outflow)
Summary: international flows of goods and capital
nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another
an increase in the value of a currency as measured by the amount of foreign currency it can buy
an decrease in the value of a currency as measured by the amount of foreign currency it can buy
real exchange rate
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 (equation 1)
(Nominal exchange rate * Domestic price)
real exchange rate (equation 2, example)
(foreign currency per £ * Price index per UK basket)
(Price index per foreign basket)
purchasing power parity ppp
a theory of exchange rate whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
the process of taking advantage of differences in prices in different markets
common currency area
a geographical area, possibly covering several countries, in which a common currency is used
(e.g. Italy and Germany using Euro's)
Net exports are defined as imports minus exports. (T or F?)
UK net capital outflow falls when Whole Foods Inc of the USA buys retail premises in Kensington, London. (T or F?)
For any country, net exports are always equal to net capital outflow because every international transaction involves an exchange of an equal value of some combination of goods and assets. (T or F?)
For a given amount of UK national saving, an increase in UK net capital outflow decreases UK domestic investment. (T or F?)
Valuable technologically advanced goods are less likely to be traded internationally because shipping costs absorb too much of the potential profit. (T or F?)
A country that exports more than it imports is said to have a trade deficit. (T or F?)
If the yen/dollar exchange rate rises, the dollar has appreciated. (T or F?)
If a case of mineral water costs €8 in the Eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro. (T or F?)
If purchasing power parity holds, the real exchange rate is always equal to 1. (T or F?)
If the UK's money supply grows faster than Switzerland's, the value of the pound should rise relative to the value of the Swiss franc. (T or F?)
If the nominal exchange rate is 2 UK pounds per US dollar, and if the price of a Big Mac is $2 in the USA and 6 pounds in the UK, then the real exchange rate is 2/3 British Big Mac per American Big Mac. (T or F?)
In order to increase domestic investment, a country must either increase its saving or decrease its net foreign investment. (T or F?)
Arbitrage is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where it is expensive. (T or F?)
Arbitrage tends to cause prices for the same good to diverge from one another. (T or F?)
If a company based in the UK prefers a strong pound (a pound with a high foreign exchange value), then the company probably exports more than it imports. (T or F?)
An economy that interacts with other economies is known as
a. an export economy.
b. a friendly economy.
c. an open economy.
d. a balanced trade economy.
e. an import economy.
Each of the following is a reason why international trade has expanded in recent decades except which one?
a. Technological improvements have meant that countries have become more similar in terms of the goods they can produce.
b. Many new high technology goods have been introduced for which the cost of transport relative to the value of the product is low.
c. There have been improvements in technology that have improved telecommunications between countries.
d. Policy makers have promoted policies to increase international trade, such as the General Agreement on Tariffs and Trade, and subsequently established the World Trade Organization.
e. Larger cargo ships and aeroplanes have reduced the cost of transporting goods.
Which of the following statements is true about a country with a trade deficit?
a. Net exports are negative.
b. Net capital outflow must be positive.
Exports exceed imports.
d. Net exports are positive.
e. none of these answers
Which of the following would directly increase UK net capital outflow?
a. Rolls Royce sells an aircraft engine to Boeing of the USA.
b. The Japanese financial company Nomura buys shares in Vodafone.
c. BP builds a new oilrig in Venezuela.
d. Honda builds a new plant in Swindon, England.
Which of the following is an example of foreign direct investment?
a. General Motors buys steel from South Korea.
b. General Motors of the USA buys shares in Saab of Sweden.
c. McDonald's builds a restaurant in Moscow.
d. UK publisher Bloomsbury sells the rights to make a film of a Harry Potter book to an American film studio.
If Japan exports more than it imports,
a. Japan's net exports are negative.
b. Japan is running a trade deficit.
c. Japan's net capital outflow must be positive.
d. Japan's net capital outflow must be negative.
If the USA saves $1,000 billion and US net capital outflow is - $200 billion, US domestic investment is
a. $800 billion.
b. $1,200 billion.
c. -$200 billion.
d. $1,000 billion.
e. $200 billion.
If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per euro,
a. none of these answers
b. the euro has appreciated.
c. the euro has depreciated.
d. the euro could have appreciated or depreciated depending what happened to relative prices in Brazil and the Eurozone countries.
Suppose the real exchange rate between Russia and the UK is defined in terms of bottles of Russian vodka per bottle of UK vodka. Which of the following will increase the real exchange rate (that is, increase the number of bottles of Russian vodka per bottle of UK vodka)?
a. an increase in the price in pounds of UK vodka
b. None of the changes described in these answers will increase the real exchange rate.
c. an increase in the number of roubles for which the pound can be exchanged
d. All of the changes described in these answers will increase the real exchange rate.
e. a decrease in the price in roubles of Russian vodka
The most accurate measure of the international value of the UK pound is
a. an exchange rate index that accounts for many exchange rates.
b. the yen/pound exchange rate.
c. the pound/dollar exchange rate.
d. the euro/pound exchange rate.
e. the Swiss franc/pound exchange rate.
If the nominal exchange rate between UK pounds and US dollars is 0.5 pound per dollar, how many dollars can you get for a pound?
a. 1.5 dollars
b. 0.5 of a dollar
c. 1 dollar
e. none of these answers
Suppose the nominal exchange rate between the Japanese yen and the UK pound is 100 yen per pound. Further, suppose that a kilogram of rice costs £2 in the UK and 250 yen in Japan. What is the real exchange rate between Japan and the UK?
a. 2.5 kilograms of Japanese rice per kilogram of UK rice
b. 0.5 kilograms of Japanese rice per kilogram of UK rice
c. none of these answers
d. 1.25 kilograms of Japanese rice per kilogram of UK rice
e. 0.8 kilograms of Japanese rice per kilogram of UK rice
Which of the following people or firms would be pleased by a depreciation of the pound?
a. All the people and firms mentioned in these answers.
b. A French exporter of wine to the UK.
c. An American tourist visiting London.
d. A UK importer of French wine.
e. A UK company that wishes to expand abroad by building a factory in Poland.
Suppose a cup of coffee is 1.5 euros in Germany and £0.50 in the UK. If purchasing power parity holds, what is the nominal exchange rate between euros and pounds?
a. 3 euros per pound
b. 1.5 euros per pound
c. 0.75 euro per pound
d. 1/3 euro per pound
Which of the following products would likely be the least accurate if used to calculate purchasing power parity?
e. Dental services
Suppose the money supply in Mexico grows more quickly than the money supply in the USA. We would expect that
a. The Mexican peso should appreciate relative to the US dollar.
b. the Mexican peso should depreciate relative to the US dollar.
c. none of these answers
d. the Mexican peso should maintain a constant exchange rate with the US dollar because of purchasing power parity.
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, it is known as
a. net exports.
b. purchasing power parity.
c. net capital outflow.
d. currency appreciation.
Suppose a resident of the USA buys a Jaguar car from the UK, and the UK exporter uses the receipts to buy shares in Boeing. Which of the following statements is true from the perspective of the UK?
a. Net exports fall, and net capital outflow rises.
b. Net exports rise, and net capital outflow rises.
c. none of these answers
d. Net exports rise, and net capital outflow falls.
e. Net exports fall, and net capital outflow falls.
Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?
a. An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged.
b. For a given amount of saving, an increase in net capital outflow must decrease domestic investment.
c. For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.
d. Saving is the sum of investment and net capital outflow.
Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of the following statements is true? Over this period,
a. the value of the dollar should have fallen compared to the value of the pound and the yen.
b. none of these answers
c. the yen should have fallen in value compared to the pound and risen compared to the dollar.
d. the value of the pound should have risen compared to the value of the yen and the dollar.
e. the yen should have risen in value compared to the pound and fallen compared to the dollar.
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