Exam 5
!
Chapter 32 and 33
!
Wednesday,April 23
Chapter 32
!
The Macroeconomics
of Open Economies
Key Terms
closed economy	

open economy	

exports	

imports	

net exports	

trade balance	

trade surplus	

trade deficit	
...
Global Device
ARM Holdings	

Wolfson 	

Marvel	

Skyworks	

CSR	

Linear Technologies	

NXP 	

National Semiconductor	

Sharp	

Samsung	...
450,000 iPhones and cost about $242,000 to charter, with fuel
accounting for more than half the expense. 54 cents or aroun...
Global Device
Made on Earth
NewYork 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 Economy
An 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	

NewYork 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
service...
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 qua...
Efficient Market
No impediments	

No trade barriers	

Good information
Purchasing Power Parity
PPP
Identical products should sell
for identical prices	

!
(ignore transportation and
transaction...
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. fo...
Quiz: Name and ID	

1.What is Arbitrage?	

2. Does Saudi Arabia have a trade surplus or trade
deficit?	

3.What is the offic...
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
Eco 202 ch 32 macroeconomics of an open economy
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Eco 202 ch 32 macroeconomics of an open economy

  1. 1. Exam 5 ! Chapter 32 and 33 ! Wednesday,April 23
  2. 2. Chapter 32 ! The Macroeconomics of Open Economies
  3. 3. Key Terms closed 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 ! !
  4. 4. Global Device
  5. 5. 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
  6. 6. 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
  7. 7. Global Device Made on Earth
  8. 8. NewYork City 1800
  9. 9. Trade can make everyone better off
  10. 10. Free to Trade
  11. 11. Open Economy An economy that interacts freely with other economies around the world
  12. 12. Closed Economy An economy that does not interact with other economies around the world
  13. 13. Exports Goods and services that are produced domestically and sold abroad
  14. 14. Imports Goods and services that are produced abroad and sold domestically
  15. 15. Net Exports The value of a nation’s exports minus the value of its imports; also called the trade balance
  16. 16. Trade Balance The value of a nation’s exports minus the value of its imports; also called the net exports
  17. 17. Net Exports = Exports - Imports
  18. 18. Petro
  19. 19. Source: CIA World Fact Book 2013
  20. 20. Source: CIA World Fact Book 2013
  21. 21. Trade Surplus An excess of exports over imports
  22. 22. Trade Deficit An excess of imports over exports
  23. 23. Balanced Trade When imports equal exports
  24. 24. Net Capital Outflow The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
  25. 25. Two ways to invest Direct Indirect
  26. 26. Foreign Direct Investment FDI Directly investing in creating a company
  27. 27. Foreign Portfolio Investment FPI Buying stock in a foreign company
  28. 28. Stock Portfolio Carry Stock Certificates
  29. 29. First Stock Exchange Amsterdam Netherlands 1602
  30. 30. Wall Street NewYork City
  31. 31. Saudi Arabia Stock Market
  32. 32. Nominal Exchange Rate The rate at which a person can trade the currency of one country for the currency of another
  33. 33. Appreciation An increase in the value of a currency as measured by the amount of foreign currency it can buy
  34. 34. Depreciation A decrease in the value of a currency as measured by the amount of foreign currency it can buy
  35. 35. 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
  36. 36. Law of One Price Identical products should sell for identical prices ! (ignore transportation and transaction costs)
  37. 37. Arbitrage Buy low in one market Sell high in another market Close the value gap
  38. 38. 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
  39. 39. Efficient Market No impediments No trade barriers Good information
  40. 40. Purchasing Power Parity PPP Identical products should sell for identical prices ! (ignore transportation and transaction costs)
  41. 41. 3.75 0.267 Always two rates ! The inverse of each other 1   3.75 = 0.267 1   0.267= 3.75
  42. 42. Cost the same around the world? Purchasing Power Parity
  43. 43. $4.27 SAR 15
  44. 44. $4.27 x 3.75 = SAR 16 SAR 15 ÷ 3.75 = $4.00
  45. 45. $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
  46. 46. 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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