Open-Economy Macroeconomics: Basic Concepts

These flashcards cover essential vocabulary related to open-economy macroeconomics, including key concepts about trade, capital flow, exchange rates and their implications.

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.

Trade surplus

A situation where exports are greater than imports.

Trade deficit

A situation where imports are greater than exports.

Balanced trade

A situation where exports equal imports.

Net capital outflow (NCO)

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

Real exchange rate

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

Purchasing-power parity (PPP)

The theory that a unit of any given currency should be able to buy the same quantity of goods in all countries.

Arbitrage

The practice of taking advantage of price differences for the same item in different markets.

Nominal exchange rate

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

Depreciation

A decrease in the value of a currency as measured by the amount of foreign currency it can buy.

Appreciation

An increase in the value of a currency as measured by the amount of foreign currency it can buy.

Trade balance

The difference between the value of a country's exports and its imports.