Macroeconomics of Open Economies

Flashcards covering key vocabulary from the Open Economies lecture.

Closed economy

Economy that does not interact with other economies in the world

Open economy

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 (NX)

value of exports – value of imports

Trade surplus

Exports are greater than imports

Trade deficit

Imports are greater than exports

Balanced trade

Exports = Imports

Foreign direct investment

Domestic residents actively manage the foreign investment

Foreign portfolio investment

Domestic residents purchase foreign stocks or bonds

Net capital outflow (NCO)

Purchase of foreign assets by domestic residents, minus the purchase of domestic assets by foreigners.

Nominal exchange rate

Rate at which one country’s currency trades for another

Currency appreciation

When the nominal exchange rate rises, a currency increases in value relative to other currencies

Currency depreciation

When the nominal exchange rate falls, a currency decreases in value relative to other currencies

Real exchange rate

Rate at which the goods and services of one country trade for the goods and services of another

The law of one price

After accounting for transportation costs and trade barriers, identical goods sold in different locations must sell for the same price.

Arbitrage

Taking advantage of price differences for the same item in different markets

Purchasing power parity (PPP)

A unit of currency should be able to buy the same quantity of goods and services in any country