Eco 202 ch 32 macroeconomics of an open economy

Exam 5

Chapter 32 and 33

Tuesday April 23

Chapter 32

The Macroeconomics of Open Economies

Key Termsclosed economyopen economyexportsimportsnet exportstrade balancetrade surplustrade deficitbalanced trade

net capital outflownominal exchange rateappreciationdepreciationreal exchange ratepurchasing power parity

Global Device

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

Trade can make everyone better off

Open Economy

An economy that interacts freely with

other economies around the world

Closed Economy

an economy that does not interact with other economies around the

world

Exports

Goods and services that are produced

domestically and sold abroad

Imports

Goods and services that are produced abroad and sold domestically

Net Exports

The value of a nation’s exports minus the value of its imports; also called the

trade balance

Trade Balance

The value of a nation’s exports minus the value of its imports; also called the

net exports

Net Exports

= Exports - Imports

Trade Surplus

An excess of exports over imports

Trade Deficit

An excess of imports over exports

Balanced Trade

When imports equal exports

Net Capital OutflowThe purchase of foreign

assets by domestic residents minus the purchase of

domestic assets by foreigners

Foreign Direct Investment

FDI

Directly investing in creating a company

Foreign Portfolio Investment

FPI

Buying stock in a foreign company

Nominal Exchange Rate

The rate at which a person can trade the currencyof one country for the currency of another

Appreciation

An increase in the value of a currency as measured by the amount of 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

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

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

Cost the same around the world?

Purchasing Power Parity

$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