1. Exam 5
!
Chapter 32 and 33
!
Wednesday,April 23

2. Chapter 32
!
The Macroeconomics
of Open Economies

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
!
!

5. Global Device

6. 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

7. 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

9. Global Device
Made on Earth

11. NewYork City 1800

12. Trade can make
everyone better off

13. Free to Trade

14. Open Economy
An economy that interacts
freely with other economies
around the world

15. Closed Economy
An economy that does not
interact with other
economies around the
world

16. Exports
Goods and services that are
produced domestically and
sold abroad

17. Imports
Goods and services that are
produced abroad and sold
domestically

18. Net Exports
The value of a nation’s
exports minus the value of its
imports; also called the trade
balance

19. Trade Balance
The value of a nation’s
exports minus the value of
its imports; also called the
net exports

20. Net Exports
= Exports - Imports

21. Petro

23. Source: CIA World Fact Book 2013

24. Source: CIA World Fact Book 2013

25. Trade Surplus
An excess of exports
over imports

26. Trade Deficit
An excess of imports
over exports

27. Balanced Trade
When imports equal
exports

28. Net Capital Outflow
The purchase of foreign
assets by domestic residents
minus the purchase of
domestic assets by foreigners

29. Two ways to invest
Direct
Indirect

30. Foreign Direct
Investment
FDI
Directly investing in
creating a company

31. Foreign Portfolio
Investment
FPI
Buying stock in a
foreign company

32. Stock
Portfolio
Carry
Stock
Certificates

33. First
Stock
Exchange
Amsterdam
Netherlands
1602

35. Wall Street
NewYork City

37. Saudi Arabia Stock
Market

38. Nominal Exchange Rate
The rate at which a person
can trade the currency
of one country for the
currency of another

39. Appreciation
An increase in the value of a
currency as measured by the
amount of foreign currency it
can buy

40. Depreciation
A decrease in the value of a
currency as measured by the
amount of foreign currency it
can buy

41. 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

43. Law of One Price
Identical products should sell
for identical prices
!
(ignore transportation and
transaction costs)

44. Arbitrage
Buy low in one market
Sell high in another market
Close the value gap

45. 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

46. Efficient Market
No impediments
No trade barriers
Good information

47. Purchasing Power Parity
PPP
Identical products should sell
for identical prices
!
(ignore transportation and
transaction costs)

48. 3.75 0.267
Always two
rates
!
The inverse
of each
other
1
3.75 = 0.267
1
0.267= 3.75

49. Cost the same around the world?
Purchasing Power
Parity

51. $4.27 SAR 15

52. $4.27
x
3.75
=
SAR 16
SAR 15
÷
3.75
=
$4.00

53. $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

54. 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?
!