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International Economics
A few chapters, Last Test for the Class
73
Economics
Undergraduate 4
12/03/2012

Additional Economics Flashcards

 


 

Cards

Term
Balance of Payment
Definition
A record of economic transactions between residesnts of one country and the rest of the world 
Term
Credit Transaction
Definition
One that results in a reciept of a payment from foreigners
Term
Debit Transaction
Definition
One that leads to a payment to foreigners
Term
Example of Credit
Definition

Exports

Income recieved from investment abroad

Investment in US by foreign

Gifts and Aid Recieved

Term
Example of Debit
Definition

Import Merchandise 

Travel Abroad Expenditure

Oversea Investment by Residents

Gifts and Aid to foreign

Term
Investment Income
Definition

Reciept and Payment

Net Earnings on US Investment abroad 

(Dividends and Interest)

Term
Unilateral Transfer
Definition

Transfers of goods and services or financial assets as a gift

Term
Transactions that Include all international purchases or sales or assets
Definition

Direct Investment

Securities

Bank Claims and Liability 

Term
Capital and Financial Account
Definition

Transactions that include all international purchases or sales or assets 

 

Also includes official reserve assets

Term
Current Account
Definition

Refers to monetary value of international flows associeted with transaction in goods and services, investment income, and unilateral transfers

Term
Official Reserves Include
Definition

Gold

Convertible currencies

SDR (Special Drawing Right) which is an asset that could be transferred among countries. IMF manages the stock of SDR 

Term
Current VS Capital Account
Definition
Whereas the current account reflects a nation's net income, the capital account reflects net change in national ownership of assets.
Term
If Current Account is in a surplus 
Definition
Then capital account is in a deficit 
Term
When borrowed money is used to finance and increast domestic investments
Definition
This is okay beause it increases production in the future
Term
When borrowed money is used to finance consumption without boosting future production 
Definition
it might decrease consumption in the future and this is bad
Term
Current account Surplus
Definition

excess of exports over imports, investment income, and transfers

 

CA Surplus = Spends less than earns 

Deficit - spend more than earned, borrow

Term
Two sectors of the Economy 
Definition

Gov: Net Borrowing = G - T 

Private: Net Borrowing = I - S 

 

CA Deficit= (G-T) + (I-S) 

Term
When we have a CA deficit and Borrow 
Definition
It pushes current spending beyond future production 
Term
E $/L = 1.38 
Definition

It takes 1.38 dollars per pound 

 

Term

If 1Euro Costs $1.38 

How much is 1$ worth? 

Definition

1/1.38 

 

(inverse of 1.38/1) 

 

1.38 dollars: 1 Euro 

 

Term
Appreciation in the home currency leads to: 
Definition
an increase in the relative price of its exports to foreigners and a decrease in the relative price of imports from abroad 
Term
A Depreciation in the home currency 
Definition
Leads to a decrease in the realtive price of its exports to foreigners and an increase in the relative price of imports from abroad
Term
Spread
Definition

The difference in buying and selling price of a currency 

 

Spread quote will increase for a currency that is hardly traded

 

 

Term
Bid Rate
Definition
The rate that the bank buys from you
Term

Ask Rate

or offer rate

Definition
The rate that the bank sells to you
Term
Cross Rate
Definition

The rate of the third currency implied by 2 exchange rates involving 3 currencies 

 

$/L =A

$/Y =B

 

L/Y = B/A 

 

Y/L= A/B 

 

 

Term
Spot Rate
Definition
Price of on currency in terms of another at one point in time 
Term
Arbitrage 
Definition

If exchange rates arent equal there is potential to make a profit by exchanging currencies

 

Eventually the activity will equate the exchange rates in those markets

Term
Hedging
Definition
Reduce the risk of ER fluctuation
Term
Speculation
Definition
Activities that will make profit from the ER fluctuation
Term
Futures Market 
Definition
market where foreign currencies may be bought and sold for delivery in the future date 
Term
Characteristic of the futures market
Definition

(Differs from forward market) 

Only few currencies are traded

Standardized contracts

At a specific Location

Term
Futures Contracts
Definition
are at a smaller amount of currency than the forward contracts are 
Term

Options Market

(american)

Definition
A contract that provides the right to buy or sell a given amount of currency at a fixed ER on or before maturity date
Term

Options market

(European)

Definition
You get the right to buy or sell at a given amount of currency on the maturity date 
Term
Call Option
Definition
An option to buy currency
Term
Put option
Definition
An option to sell currency 
Term
Forward Exchange Market 
Definition

Currencies may be bought and sold for delivery in a future period 

(If you think depreciation might occur)

-This reduces uncertainty 

Term
Forward Premium
Definition
if the forward rate is set at a higher value than the spot rate
Term
Forward Discount
Definition
If it is sold at a value lower than the spot rate 
Term
When deciding whether there is a premium or discount
Definition
It is only straight forward if the $ is on the bottom. Otherwise, It is telling you the rate of the denominator 
Term
Exercise Price
Definition
Price of currency stated in the option contract
Term
Upper bound value 
Definition

Agree to pay 1,000,000

Suppose you want an exercise price of 1.02/$ then your upper bound value is 1,020,000

Term
Positive attributes of the Gold Standard
Definition

Durable, Storable, Portable 

Easily Recognized

Divisible into standardized unit 

Cannot easily supplied (has Value) 

Term

Quantity Theory of money 

MV = PQ

Definition

Money Supply (Velocity) = Price (Physical volume of goods

Term
MV =
Definition
Total monetary expenditure on final goods 
Term
PQ=
Definition
Value of final goods sold
Term

Assume P and Q are fixed. 

What happens to M as V+

Definition
M+
Term
CA Deficit = Gold Outflow
Definition

M - 

P- 

Exports Increase, Imports decrease and CA is restored 

Term

CA Surplus 

Gold +

Definition

M+

P+

Imports increase

Exports decrease 

and the CA is restored 

(because we had too much money, now losing) 

Term
1944 Bretton Woods Conference
Definition
Agreement to tie all currencies together and use the $ as the main currency 
Term
Free Float
Definition
Relies solely on market forces to determine ER. Overtime, ER will fluctuate randomly as the market participants react to information
Term
Managed Float
Definition
The monetary authority influences the ER through active foreign exchange market invtervention with no pre-announced path for ER 
Term
Target Zone Arrangement 
Definition
Where ER is maintinaed within a specific margin around the fixed ER 
Term
Disadvantage or Float ER 
Definition
System is subject to destabilizing speculation which is when speculators increase the variability of the ER 
Term
Fixed is used for:
Definition

1. Small Size

2. Open Economy 

3. Concentrated Trade 

 

(Trade A lot) Creates certainty for traders

If Bermuda trades a lot with US it should fix its ER with the US 

Term
Float advantages and disadvantages 
Definition

1. Large Size 

2. Closed Economy 

3. Diversified Trade 

 

US trades less so they have a float. 

If the depreciation is expected then the ER will depreciate even more due to speculation. 

Term
International Monetary Fund (IMF) 
Definition

1. Promote internatioonal monetary cooperation, exchange stanbility, and orderly exchange arrangements 

2. Fosters economic growth and high levels of employment 

3. Provides temporary financial assistance to countries to help ease the balance of payment adjustment

Term
Characteristics of IMF
Definition

- Open to foreign investment and trade 

- lower wages 

- restrict money supply to control inflation

-removes subsidies 

Term
How to determine IMF policy
Definition

Member countries will vote. This is equated with amount of financial contribution 

 

US gets 17% 

US, Japan, Germany, France, UK have almost 40% of the vote

Term
Factors that affect the Supply and Demand of Currency 
Definition

Market Fundamentals 

 

Market Expectations

Term
Market Fundamentals 
Definition

Bilateral trade balance

Real income

Real Interest rate

Inflation Rate 

Preference for domestic and foreign products

Production Costs

Monetary and Fiscal Policy 

Trade Policy 

Term
Market Expectation
Definition

News about future market fundamentals

Speculative opinion about the future ER 

Term

Currency with a lower I will have currency _____________ 

Currency with higher I will have currency _____________

Definition

Depreciation

 

Appreciation

Term
Real Interest Rate formula
Definition
Nominal Interest rate - Inflation Rate 
Term
Law of One Price Assumptions
Definition

Key: frictionless trade 

No transaction costs

No barriers to trade

Identicle goods in each location

No barriers to price adjustment 

Term
What happens when LOOP doesnt hold and prices are different? 
Definition

Opportunity for arbitrage 

Buy low and sell high 

 

Term

Purchasing Power Parity PPP

 

Relative price level ratio:

Definition

Qe/QUS = E$/LPE

 

If PPP Holds then 

Qe/QUS = 1 

Term
Q = Real Exchange rate
Definition

In Qe/US = E$/LPE

                   US 

Term

If the real exchange rate is above 1 

 

Definition

Then foreign goods are relatively expensive

Foreign Currency is over valued

 

 

We expect it to depreciate relative to the dollar in the future 

Term
The Big Mac Index
Definition

The economist newspaper - invented in 1986 by editor Pam Woodal 

In 2004 they tried using the starbucks tall latte 

Term
What explains deviations from the PPP
Definition

1. Transactin costs 

2. Non-traded goods

3. Imperfect competition and large obstacles (like patents) 

4. Price Stickiness

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