ECON 010 Chapter Notes - Chapter 29: Potential Output, Foreign Portfolio Investment, Exchange Rate

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31 May 2018
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ECON010 Chapter 29: Macroeconomics in an open economy
Open economy: an economy that has interactions in trade or finance with other countries
Closed economy: no interaction in trade or finance with other countries
Balance of payments: record of a countryā€™s trade with other countries in
goods/services/assets
Current account: part of balance of payments that records a countryā€™s net exports, net
income on investments, and net transfers
Balance of trade: differences between value of goods a country exports and value of goods
a country imports
Financial accounts: part of balance of payments that records purchases of assets a country
has made abroad and foreign purchases of assets in the country
Net foreign investment: diff btwn capital outflows from a country and capital inflows;
=net foreign direct investment+net foreign portfolio investment
Capital account: part of balance of payments that records relatively minor transactions
such as migrantsā€™ transfers and sales and purchases of nonproduced, nonfinancial assets
Nominal exchange rate: value of one countryā€™s currency in terms of another countryā€™s
currency
Currency appreciation: increase in market value of one currency relative to another
currency
Currency depreciation: decrease in market value of one currency relative to another
currency
Speculators: currency traders who buy and sell foreign exchange in an attempt to profit
from changes in exchange rates
Real exchange rate: price of domestic goods in terms of foreign goods
Saving and investment equation: equation that shows that national saving=domestic
investment+net foreign investment
Current Account
-exports and imports (net exports), income received by US residents from foreign
investments and income paid on investments in US owned by residents of other countries
(net income on investments), diff btwn transfers made to residents of other countries and
transfers received by US residents from other countries (net transfers)
-payments made by US residents (-)
-largest part: balance of trade
-exports>imports: trade surplus
-net exports=Balance of Trade+Balance of Services (diff btwn value of services a country
exports and value of services a country imports)
-net exports doesnā€™t equal current account balance b/c current account balance also
includes net income on investments and net transfers (but these items are small so often
NX~current account balance)
Financial account
-records LT flows of funds into and out of country
-capital outflow: investor in US buys bond issued by foreign company/gov or when US firm
build factory in another country
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Document Summary

Econ010 chapter 29: macroeconomics in an open economy. Open economy: an economy that has interactions in trade or finance with other countries. Closed economy: no interaction in trade or finance with other countries. Balance of payments: record of a country"s trade with other countries in. Current account: part of balance of payments that records a country"s net exports, net income on investments, and net transfers. Balance of trade: differences between value of goods a country exports and value of goods a country imports. Financial accounts: part of balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country. Net foreign investment: diff btwn capital outflows from a country and capital inflows; Capital account: part of balance of payments that records relatively minor transactions such as migrants" transfers and sales and purchases of nonproduced, nonfinancial assets. Nominal exchange rate: value of one country"s currency in terms of another country"s currency.

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