ECON 3212 – Exam 2 Study Guide

A set of flashcards to review key vocabulary and concepts related to Open Economy, Trade Balance, and Exchange Rates for ECON 3212.

Open Economy Identity

In this model, spending does not have to equal output (Y = C + I + G) because a country can borrow or lend from abroad.

Savings and Investment Identity

The rearranged identity indicates that the difference between an economy's saving and investment is net exports (S - I = NX).

Net Capital Outflow (NCO)

The relationship is expressed as S - I = NCO, representing net foreign investment.

Trade Surplus

A situation where net exports (NX) are positive, indicating exports exceed imports.

Trade Deficit

A situation where net exports (NX) are negative, indicating imports exceed exports.

Bilateral Trade Balance

The balance of trade specifically between two countries.

Small Open Economy Model Assumptions

1. No adjustment in r to make S = I. 2. Cannot significantly impact world markets. 3. Perfect capital mobility.

World Interest Rate (r*)

The interest rate in the global market that affects domestic investment and savings.

Nominal Exchange Rate

The price of one currency in terms of another (e.g., $1 = €0.89).

Appreciation of Currency

When the value of a currency rises compared to another currency.

Depreciation of Currency

When the value of a currency falls compared to another currency.

Real Exchange Rate

The relative price of goods between two countries, reflecting purchasing power.

Law of One Price

The principle stating that identical goods should sell for the same price in different locations, preventing arbitrage.

Purchasing Power Parity (PPP)

The theory that exchange rates should equalize the purchasing power of two currencies.

Impact of Inflation on Currency Value

High inflation in a country tends to depreciate its currency.

Terms of Trade

Another term for real exchange rates, reflecting the relative value of goods between nations.

Net Exports (NX)

The difference between a country’s total exports and total imports.

Perfect Capital Mobility

The ability for residents to fully access world markets for borrowing and investment.

Small Open Economy

An economy that is too small to influence global market prices significantly.

Trade Balance Indicators

Positive NCO suggests a trade surplus; negative NCO suggests a trade deficit.

Inflation Rates and Currency Value

The difference in inflation rates between countries can influence nominal exchange rates.