Term
| NCO + why it always equals NX |
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Definition
Purchase of Foreign - Purchase of Domestic.
Positive = Trade surplus
Negative = trade deficit
Always = NX because every transaction involves trading of an asset for a good/service, making both sides of the equation affected by the same amounts. |
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Term
| Nominal exchange rates (e) |
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Definition
| Trading one currency for another |
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Term
| Appreciation/Depreciation |
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Definition
| Country's currency becoming more/less expensive compared to other country's currency. |
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Term
| Real Exchange rate (real e) |
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Definition
Rate at which a person can trade one country's goods/services for another country's goods/serives.
Real e = (e * p) / Pf
p = domestic price level
pf = foreign country's price level |
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Term
| Purchasing power parity (PPP) + equation + 2 reasons it doesn't always hold |
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Definition
Goods will/should sell for the same price in all countries, because otherwise there would be opportunities to exploit price discrepancies, and supply+demand would make prices the same.
1 = e * P / Pf
Reasons it doesn't always hold
1) Not all goods are easily traded
2) even tradable goods are not always perfect substitutes for each other. |
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Term
| Interest Rate Parity (IRP) + Limitations |
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Definition
Same logic as PPP, interest rates will be largely the same in all countries (matching the world interest rate), because any discrepancy would lead to exploitation and the subsequent return to the world interest rate by Supply+demand.
Reasons IRP is not always applicable
1) All loans carry the possibility of default (higher interest rate on higher risk loans)
2) Financial assets sold in different countries are not always perfect substitutes for each other (differences in taxes in different countries). |
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Term
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Definition
| Full access to world financial markets. |
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