Ch 32 macroeconomics of an open economy
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Transcript of Ch 32 macroeconomics of an open economy
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Chapter 32
The Macroeconomics of Open Economies
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Key Termsclosed economyopen economyexportsimportsnet exportstrade balancetrade surplustrade deficitbalanced trade
net capital outflownominal exchange rateappreciationdepreciationreal exchange ratepurchasing power parity
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Global Device
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ARM HoldingsWolfson Marvel
SkyworksCSR
Linear TechnologiesNXP
National SemiconductorSharp
SamsungToshibaInfineon
BroadcomNumonyx
MicronDialog Semiconductor
Texas InstrumentsSTMicroelectronics
Silicon StorageRF Microdevices
Cirrus Logic
U.S.U.K.
GermanyKoreaJapan
TaiwanChina
Saudi Arabia
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450,000 iPhones and cost about $242,000 to charter, with fuel accounting for more than half the expense. 54 cents or around 2 riyals
44,700 gallons or 170,000 liters
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Global Device
Made on Earth
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New York City 1800
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Trade can make everyone better off
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Free to Trade
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Open Economy
An economy that interacts freely with other economies
around the world
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Closed EconomyAn economy that does not
interact with other economies around the
world
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Exports
Goods and services that are produced domestically and
sold abroad
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Imports
Goods and services that are produced abroad and sold
domestically
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Net Exports
The value of a nation’s exports minus the value of its imports; also called the trade
balance
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Trade Balance
The value of a nation’s exports minus the value of its imports; also called the
net exports
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Net Exports
= Exports - Imports
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Petro
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Source: CIA World Fact Book 2013
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Source: CIA World Fact Book 2013
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Trade Surplus
An excess of exports over imports
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Trade Deficit
An excess of imports over exports
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Balanced Trade
When imports equal exports
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Net Capital Outflow
The purchase of foreign assets by domestic residents
minus the purchase of domestic assets by foreigners
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Two ways to invest
Direct
Indirect
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Foreign Direct Investment
FDI
Directly investing in creating a company
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Foreign Portfolio Investment
FPI
Buying stock in a foreign company
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StockPortfolio
Carry Stock
Certificates
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FirstStock
Exchange
AmsterdamNetherlands
1602
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Wall StreetNew York City
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Saudi Arabia Stock Market
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Nominal Exchange Rate
The rate at which a person can trade the currencyof one country for the currency of another
Sec 3 - 6 april
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Appreciation
An increase in the value of a currency as measured by the amount of foreign currency it
can buy
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Depreciation
A decrease in the value of a currency as measured by the amount of foreign currency it
can buy
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Foreign Exchange Rate
The rate at which a person can trade the goods and services of one country for the goods and
services of another
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Law of One Price
Identical products should sell for identical prices
(ignore transportation and transaction costs)
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Arbitrage
Buy low in one market
Sell high in another market
Close the value gap
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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 in all
countries
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Efficient Market
No impediments
No trade barriers
Good information
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Purchasing Power Parity PPP
Identical products should sell for identical prices
(ignore transportation and transaction costs)
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3.75 0.267
Always two rates
The inverse of each other
1 3.75 = 0.267
1 0.267= 3.75
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Cost the same around the world?
Purchasing Power Parity
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$4.27 SAR 15
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$4.27x
3.75=
SAR 16
SAR 15÷
3.75=
$4.00
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$4.27 x 3.75
Implied Exchange Rate 15 to 4.27 = 3.51 to 1
15
Buy Big Macs in Saudi for 15($4.00) and resell in the U.S. for 16 ($4.27) and make
6.75% profit
Currency is undervalued by 6.4% (3.75 to 3.51)
16
x 3.75$4.00
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Quiz: Name and ID
1. What is Arbitrage?
2. Does Saudi Arabia have a trade surplus or trade deficit?
3. What is the official exchange rate between riyals and dollars?