Open-Economy Macroeconomics: Basic Concepts Flashcards

Comprehensive vocabulary flashcards covering the fundamental concepts of open-economy macroeconomics, including trade flows, capital flows, and exchange rate theories based on Mankiw's lecture notes.

Closed economy

An economy that does not interact with other economies in the world.

Open economy

An economy that interacts freely 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 referred to as the trade balance ($NX$).

Trade balance

Another term for net exports, representing the value of exports minus the value of imports.

Trade surplus

An excess of exports over imports, resulting in a positive net export value (NX > 0).

Trade deficit

An excess of imports over exports, resulting in a negative net export value (NX < 0).

Balanced trade

A situation in which exports equal imports, meaning net exports are zero ($NX = 0$).

Net capital outflow (NCO)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

Foreign direct investment

A form of capital flow where a capital investment is owned and operated by a foreign entity.

Foreign portfolio investment

A form of capital flow involving an investment financed with foreign money but operated by domestic residents.

Capital outflow

A condition where Net Capital Outflow is positive (NCO > 0), meaning domestic residents are buying more foreign assets than foreigners are buying domestic assets.

Capital inflow

A condition where Net Capital Outflow is negative (NCO < 0), meaning domestic residents are buying fewer foreign assets than foreigners are buying domestic assets.

Saving-Investment Identity in an Open Economy

The relationship stating that national saving ($S$) is equal to the sum of domestic investment ($I$) and net capital outflow ($NCO$), expressed as $S = I + NCO$.

Nominal exchange rate

The rate at which a person can trade the currency of 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; also called "strengthening."

Depreciation

A decrease in the value of a currency as measured by the amount of foreign currency it can buy; also called "weakening."

Exchange rate index

A single measure used by economists to convert many nominal exchange rates into one average value.

Euro

A common currency for many European nations that started circulating on January 1, 2002, with monetary policy controlled by the European Central Bank (ECB).

Real exchange rate

The rate at which a person can trade the goods and services of one country for the goods and services of another.

Real exchange rate formula

The calculation defined as $ext{real exchange rate} = \frac{e imes P}{P^<em>}$, where $e$ is the nominal exchange rate, $P$ is the domestic price index, and $P^</em>$ is the foreign price index.

Purchasing-power parity (PPP)

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.

Law of one price

A logic suggesting that a good must sell for the same price in all locations to prevent arbitrage.

Arbitrage

The process of taking advantage of differences in prices for the same item in different markets.

PPP Nominal Exchange Rate calculation

Under purchasing-power parity, the nominal exchange rate is determined by the ratio of foreign prices to domestic prices: $e = \frac{P^*}{P}$.