Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the...
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Transcript of Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the...
![Page 1: Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the rest of the world through... Goods market Financial markets.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e455503460f94b39f02/html5/thumbnails/1.jpg)
Macroeconomics – Unit 6
![Page 2: Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the rest of the world through... Goods market Financial markets.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e455503460f94b39f02/html5/thumbnails/2.jpg)
An open economy (as opposed to a _________ economy) interacts with the rest of the world through...
Goods market
Financial markets
(1)
(2)
closed
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The exchange rate for a currency impacts a country’s exports.
If the British pound depreciates relative to the US dollar, will people want to buy more Cadbury’s chocolate or Hershey’s chocolate?
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If real interest rates are higher in Mexico than in the USA, will investors want to buy bonds from Mexico or from the USA?
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If the Japanese yen appreciates relative to the US dollar what will happen to the exports of US beef?
To buy something from a country you must pay in that country’s currency.
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A. The Balance of Payments records all these types of international transactions.
If the transaction required us to purchase & spend foreign currency to complete the transaction it is recorded as a debit
Money flows out of the country.6 of 21
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Balance of Payments
If the transaction required others to purchase our currency to complete the transaction, it is recorded as a credit.
Money flows into the country.
![Page 8: Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the rest of the world through... Goods market Financial markets.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e455503460f94b39f02/html5/thumbnails/8.jpg)
The Balance of Payments includes 2 main sub divisions…
Current Account
Capital Account
Tracks flows of
1- financial assets
2- real assets
Tracks flows of goods & services
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In Theory the current account must “balance” with the Capital Account and the Financial Account
Current Account
Capital Account
=
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Exports – domestically produced goods & services that are sold abroad
Imports – foreign produced goods & services that are sold domestically
Net exports = exports – imports
also called our trade balance
B. goods & services
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Net exports = exports – imports
also called our trade balance
______ ______ - when country sells more abroad than it buys
______ ______ - sells fewer goods & services abroad than it buys
trade surplus
trade deficit
![Page 12: Macroeconomics – Unit 6. An open economy (as opposed to a _________ economy) interacts with the rest of the world through... Goods market Financial markets.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e455503460f94b39f02/html5/thumbnails/12.jpg)
Net capital outflow =
If US citizen buys stock in British Petroleum Corp., net capital outflow will ___________
increase
C. financial markets
purchase of foreign assets by domestic residents minus
purchase of domestic assets by foreigners
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Net capital outflow
financial markets
If a Mexican citizen buys stock in KFC., net capital outflow will _________.decrease
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When net capital outflow is negative, then domestic residents are buying _________ foreign assets than foreigners are buying domestic.
fewer
Capital is said to be “flowing into” the country.
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When net capital outflow is positive then domestic residents are buying _________ foreign assets than foreigners are buying domestic.
more
Capital is said to be “flowing out” of the country.
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Nominal exchange rate -- rate at which a person can trade the currency of one country for he currency of another
most countries have free floating exchange rates which are determined by an interaction of supply & demand
D. exchange rates
S
D
Q of US $
Br.
Po
un
d /
US
$
Ex
cha
ng
e R
ate
US $
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appreciation – an increase in the value of a currency as measured by the amount of a foreign currency it can buy
depreciation – a decrease in the value of a currency as measured by the amount of foreign currency it can buy
1994 1.00 .91
2004 1.00 .75
2008 1.00 .63
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It’s Easter and Americans want to buy Cadbury’s crème eggs.
S
D
Q of Br. Pounds
US
$ /
Br.
Po
un
d
Ex
cha
ng
e R
ate
S
D
Q of US $
Br.
Po
un
d /
US
$
Ex
cha
ng
e R
ate
What happens to the value of the pound? Value of the US dollar?
Americans must supply their dollars & demand US pounds.
S1
D1
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Let’s say interest rates are higher in the USA than in Mexico. Where will investors from Mexico want to invest?
S
D
Q of Mex. Pesos
US
$ /
Me
x. p
eso
E
xch
an
ge
Ra
teS
D
Q of US $
Me
x. P
es
o /
US
$
Ex
cha
ng
e R
ate
What happens to the value of the peso? Value of the US dollar?
S1
D1
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Spain is the new hot travel destination among Mexicans.
S
D
Q of Mex. Pesos
US
$ /
Me
x. p
eso
E
xch
an
ge
Ra
teS
D
Q of Euros
Me
x. P
es
o /
Eu
ro
Ex
cha
ng
e R
ate
What happens to the value of the peso? Value of the Euro?
S1
D1
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American kids go nuts for the newest video games out of Japan.
S
D
Q of yen
US
$ /
ye
n
Ex
cha
ng
e R
ate
S
D
Q of US $
yen
/ U
S $
E
xch
an
ge
Ra
te
What happens to the value of the yen? Value of the US dollar?
S1
D1
21 of 21