Economics

?o -Tec,h S,uzhen I

re 45o PART2 MacroeconomicAnalysis

General Equation Spe(ifi€ Equation

xc : other factors influencing export expenditure

Y* "' real foreiqn 6DP or income R = currencyexchange rate {unitsof foreign currency

Per unit of domestic currencY)

xr, x2 =' coefficients of the relevant variables

m0 - other factors affecting import expenditure

Y = real domestic income mr, mr - coefficientsof the relevant variables

ft = \ - mo = other factors influencing net export expenditure

NEr CAPlrAr FLow

K:k(r-r") where

K : netcapitalflow k '. interest sensitivity of capital fiows

r " domesticintereslrate r* - interest rate inthe rest of theworld

NET CaPrrAL FLow

kt:fl,r>r't'\ (*)

kn .. fir < r'E) (+)

where

K = netcapitalflow & = capital inflows ko = capital outflows r = domesticinterestrate

r" = interest rate in the restof the world

Key Terms

balance of payments (BP) accounting

syttem, p.423

halance of ilade, P. 42o

capital infl ow lk l, P. 422 capital outflow (k ol, P, 422

<uffency apPre<iation, P. 41 9

currencY dePreciation, P. 419

<urrency exchange rate, P.418

current account, p. 423

financlal account P.424

Exercises

Technical Questions

fixed exchange rate sYstem, P.431

flexible exchange rate system, p.430

gold standard, P.431 lnternationa I MonetarY

Fund {lMF)' P' 431

managed float, P.431 net capital flow (Kp = k1 - kol, P. 422 net investment income, P. 423

nominal exchange rate, P.419 real exchange rate' P.419

' ,'.' ,1.y' ,. .rr rr.lrr,

'.'r"{

reterve assets, P.433 revenue orT-a(count, P. 425

statistical discrePancY (SDI,P.42s

sterilized intervention, P. 435

trade deficit, P.422 trade surplus, P.422 trade-weighted dollar, P. 418

unilateral transfers, P' 423

World Bank, P.431

Show the effect of dollar appreciation and depre-

ciation with the euro on the price of U'S' exports and imports by updating Table 152, as shown in the uPdated table-

2. Evaluate whether the following statements axe true or false, and explain you"r answer:

a- A trade deficit occurs when the government spends more than it receives in tax revenue'

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Economics for Maragers, Third Edition, by paul G. Famham. published by Prentice Hall. copyright o 2014 by Pearson

Education' lnc

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b. In an open, mixed economy, the equilibrium Ievel oi GDP occurs when planned saving equals Planned investment.

". A, it

"iu*e in interest rates in the rest of the

world wiII leadto a stronger dollar' d. Under a fixed exchange rate system with global

capital flows, monetarJr policy is ineffective' However, under a flexible exchange rate sys- tem, monetary policy is Wpically more effective

than fiscal policy in increasing real GDP'