Eco 202 ch 32 macroeconomics of an open economy
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Transcript of Eco 202 ch 32 macroeconomics of an open economy
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Exam 5
Chapter 32 and 33
Tuesday April 23
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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
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Trade can make everyone better off
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Open Economy
An economy that interacts freely with
other economies around the world
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Closed Economy
an 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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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 OutflowThe purchase of foreign
assets by domestic residents minus the purchase of
domestic assets by foreigners
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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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Nominal Exchange Rate
The rate at which a person can trade the currencyof one country for the currency of another
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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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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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Cost the same around the world?
Purchasing Power Parity
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$4.37
3.75 to 1 or .267 to 1
x 3.75 = 16.38
x .267 = $2.93
Implied Exchange Rate 4.37 to 11 = 2.52 to 1
Big Mac Economics
11 SR
Buy Big Macs in Saudi for 11($2.93) and resell in the U.S. for 16.38 ($4.37) and
make 49% profit
Currency is undervalued by 33 percent