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Exam 5 !
Chapter 32 and 33 !
Wednesday, April 23
Chapter 32 !
The Macroeconomics of Open Economies
Key Termsclosed economy open economy exports imports net exports trade balance trade surplus trade deficit balanced trade
net capital outflow nominal exchange rate appreciation depreciation real exchange rate purchasing power parity !
!
Global Device
ARM Holdings Wolfson Marvel
Skyworks CSR
Linear Technologies NXP
National Semiconductor Sharp
Samsung Toshiba Infineon
Broadcom Numonyx
Micron Dialog Semiconductor
Texas Instruments STMicroelectronics
Silicon Storage RF Microdevices
Cirrus Logic
U.S. U.K.
Germany Korea Japan
Taiwan China
!
Saudi Arabia
450,000 iPhones and cost about $242,000 to charter, with fuel accounting for more than half the expense. 54 cents or around 2 riyals
44,700 gallons or 170,000 liters
Global Device
Made on Earth
New York City 1800
Trade can make everyone better off
Free to Trade
Open Economy
An economy that interacts freely with other economies
around the world
Closed EconomyAn economy that does not
interact 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; also called the trade
balance
Trade Balance
The value of a nation’s exports minus the value of its imports; also called the
net exports
Net Exports
= Exports - Imports
Petro
Source: CIA World Fact Book 2013
Source: CIA World Fact Book 2013
Trade Surplus
An excess of exports over imports
Trade Deficit
An excess of imports over exports
Balanced Trade
When imports equal exports
Net Capital Outflow
The purchase of foreign assets by domestic residents
minus the purchase of domestic assets by foreigners
Two ways to invest
Direct
Indirect
Foreign Direct Investment
FDI
Directly investing in creating a company
Foreign Portfolio Investment
FPI
Buying stock in a foreign company
Stock Portfolio
Carry Stock
Certificates
First Stock
Exchange
Amsterdam Netherlands
1602
Wall Street New York City
Saudi Arabia Stock Market
Nominal Exchange Rate
The rate at which a person can trade the currency of one country for the currency of another
Appreciation
An increase in the value of a currency as measured by the amount of foreign currency it
can buy
Depreciation
A decrease in the value of a currency as measured by the amount of foreign currency it
can buy
Foreign Exchange Rate
The rate at which a person can trade the goods and services of one country for the goods and
services of another
Law of One Price
Identical products should sell for identical prices
!
(ignore transportation and transaction costs)
Arbitrage
Buy low in one market
Sell high in another market
Close the value gap
Purchasing Power Parity
A theory of exchange rates whereby a unit of any given
currency should be able to buy the same quantity of goods in all
countries
Efficient Market
No impediments
No trade barriers
Good information
Purchasing Power Parity PPP
Identical products should sell for identical prices
!
(ignore transportation and transaction costs)
3.75 0.267
Always two rates
!
The inverse of each other
1 3.75 = 0.267
1 0.267= 3.75
Cost the same around the world?
Purchasing Power Parity
$4.27 SAR 15
$4.27 x
3.75 =
SAR 16
SAR 15 ÷
3.75 =
$4.00
$4.27 x 3.75
Implied Exchange Rate 15 to 4.37 = 3.51 to 1
15
Buy Big Macs in Saudi for 15($4.00) and resell in the U.S. for 16 ($4.27) and make
7% profit
Currency is undervalued by 8 percent
16
x 3.75$4.00
Quiz: Name and ID
1. What is Arbitrage?
2. Does Saudi Arabia have a trade surplus or trade deficit?
3. What is the official exchange rate between riyals and dollars?
!
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