Net Capital Outﬂow The purchase of foreignassets by domestic residents minus the purchase of domestic assets by foreigners
Foreign Direct Investment FDIDirectly investing increating a company
Foreign Portfolio Investment FPIBuying stock in a foreign company
Nominal Exchange RateThe rate at which a person can trade the currency of one country for the currency of another
Appreciation An increase in the valueof a currency as measured by the amount of foreign currency it can buy
DepreciationA decrease in the value of a currency as measuredby the amount of foreign currency it can buy
Foreign Exchange RateThe rate at which a person can trade the goods andservices of one country for the goods and services of another
Purchasing Power Parity A theory of exchange rates whereby a unit of any givencurrency should be able to buy the same quantity of goods in all countries
Purchasing Power ParityCost the same around the world?
Big Mac Economics $4.37 x 3.75 = 16.38 3.75 to 1 or .267 to 1 11 SR x .267 = $2.93Implied Exchange Rate 4.37 to 11 = 2.52 to 1 Currency is undervalued by 33 percent Buy Big Macs in Saudi for 11($2.93) and resell in the U.S. for 16.38 ($4.37) and make 49% proﬁt
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