ECON 1BB3 Chapter Notes - Chapter 12: Foreign Portfolio Investment, Real Interest Rate, Beer In Canada

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blushhound796

12 Oct 2016

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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An open economy buys and sells goods and services in world product market and buys and sells capital assets such as stocks and bonds in world financial markets. The flow of goods: exports, imports and net exports: Coz net exports tell us whether a country is, in total, a seller or buyer in world markets for goods and services, it is called as trade balance. If nx +ive; then trade surplus, if nx ive then trade deficit. If nx is 0 means exports equal imports then its called balanced trade. Tastes of consumers for domestic and foreign goods. Prices of goods at home and abroad. Exchange rates at which ppl can use domestic currency to buy foreign currency. Income of consumers at home and abroad. Cost of transporting goods from country to country. Policies of the government toward international trade. The flow of financial resources: net capital outflow:

Related Questions

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

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Since the United States has negative net foreignâ investment, its

A. net capital flow must be negative.

B. domestic saving must be less than its domestic investment.

C. exports must be greater than its imports.

D. domestic investment must be less than its domestic saving.

Expansionary fiscal policy is less effective in an open economy because

A. increases in the money supply will reduce interest rates and lower the value of theâ dollar, reducing aggregate demand.

B. increases in government spending can increase interestâ rates, which increases the value of the dollar and crowds out net exports.

C. increases in government spending will be partly spent on importedâ goods, which do not benefit the domestic economy.

D. increases in taxes reduceâ consumption, which in turn reduces consumption of imports and increases net exports.

When the Federal reserve uses contractionary monetary policy to reduceâ inflation, it

A. sells treasury securities increasing interestâ rates, leading to a stronger dollar that lowers net exports in an open economy.

B. buys treasury securities decreasing interestâ rates, leading to a weaker dollar that lowers consumption of durables in a closed economy.

C. sells treasury securities decreasing interestâ rates, leading to a stronger dollar that lowers domestic investment in a closed economy.

D. buys treasury securities increasing interestâ rates, leading to a weaker dollar that increases net exports in an open economy.

If a country saves more than it investsâ domestically, then its net foreign investment must be (positive, negative, or zero)?

1. True or False: Increases in imports will always lead to NET job losses in the U.S. domestic economy.

Would this be false?

2. True or False: If all countries could restrict imports and promote exports, world output would rise.

Would this be false as well?

3. Which of the following statement is FALSE?
A.Quotas restrict the quantity of a good that is imported into a country.
B.One result of quotas is that consumers of the good facing the quota will pay a higher price for the good.
C.Domestic producers of the good will benefit because they face less foreign competition.
D.Government collects the revenue from quotas.

Is it B?

4. True or False: If country A has an absolute advantage in producing many goods and services over another country B, then country A will NEVER have an incentive to trade with country B.

I want to say its False because regardless if country A has an absolute advantage it still needs to trade with country B. I think?

ECON 1BB3 Chapter Notes - Chapter 12: Foreign Portfolio Investment, Real Interest Rate, Beer In Canada

ECON 1BB3 Full Course Notes

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