Open-Economy Macroeconomics Vocabulary

Twenty-three vocabulary flashcards summarizing the essential open-economy macroeconomic terms from the lecture notes.

Exchange rate

The price of one country’s currency in terms of another; the rate at which two currencies are traded for each other.

Foreign exchange

All currencies other than the domestic currency of a given country.

Floating (market-determined) exchange rates

Exchange rates that are set by unregulated supply and demand in the foreign-exchange market.

Appreciation of a currency

A rise in the value of one currency relative to another currency.

Depreciation of a currency

A fall in the value of one currency relative to another currency.

Balance of payments

A record of a country’s transactions in goods, services, and assets with the rest of the world; shows sources and uses of foreign exchange.

Balance of trade

A country’s exports of goods and services minus its imports of goods and services.

Trade deficit

The situation in which a country’s exports of goods and services are less than its imports of goods and services.

Balance on current account

Net exports of goods plus net exports of services plus net investment income plus net transfer payments.

Balance on capital account

The sum of changes in private and government assets at home and abroad during a period; records capital flows.

Net exports of goods and services (EX − IM)

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

Marginal propensity to import (MPM)

The change in imports caused by a $1 change in income.

Open-economy multiplier

1 / (1 − MPC − MPM); the income multiplier in an open economy, smaller than in a closed economy because some spending leaks into imports.

Planned aggregate expenditure in an open economy

AE ≡ C + I + G + EX − IM; total planned spending including the international sector.

Trade feedback effect

The tendency for higher economic activity in one nation to raise activity worldwide, which then feeds back into the original nation’s exports and output.

Law of one price

If transportation costs are small, the same good should sell for roughly the same price in different countries.

Purchasing-power-parity (PPP) theory

Holds that exchange rates adjust so the price of similar goods is the same across countries; currencies of higher-inflation nations tend to depreciate.

Equilibrium exchange rate

The exchange rate at which the quantity of a foreign currency demanded equals the quantity supplied.

Capital controls

Government restrictions that limit or prevent the buying or selling of a country’s currency in foreign-exchange markets.

Market for foreign exchange

The institutional arena where currencies are bought and sold and exchange rates are determined.

J-curve effect

After a currency depreciation, a country’s trade balance may initially worsen before improving as quantities of exports and imports adjust.

Price feedback effect

A process in which changes in domestic prices alter import and export prices, which then influence the domestic price level through trade.