1post - exchange rate changes so that each dollar buys more...

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214   Chapter 13/Open-Economy Macroeconomics: Basic Concepts KEY POINTS: 1. Net exports are the value of domestic goods and services sold abroad minus the value of  foreign goods and services sold domestically.  Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners.  Because every international transaction involves an exchange of an asset for a good or service, an economy’s  net capital outflow always equals its net exports. 2. An economy’s saving can be used to finance investment at home or buy assets abroad.  Thus, national saving equals domestic investment plus net capital outflow. 3. The nominal exchange rate is the relative price of the currency of two countries, and the real exchange rate is the relative price of the goods and services of two countries.  When the nominal
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Unformatted text preview: exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. When the nominal exchange rate changes so that each dollar buys less foreign currency, the dollar is said to depreciate or weaken. 4. According to the theory of purchasing-power parity, a dollar (or a unit of any other currency) should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those two countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies....
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