Intermediate Macroeconomics Ch18 notes

Intermediate Macroeconomics Ch18 notes - Chapter 18:...

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Openness in Goods Markets Measurements Export ratio = total export value/GDP Import ratio = total import value/GDP Openness ratio = total value of exports and imports/GDP The share of tradable goods to aggregate output. Tradable goods are those compete with foreign goods in either domestic or foreign markets. A small economy with limited endowments tends to have a larger trade or export ratio. Export ratio can be bigger than one, which indicates that export value exceeds GDP. In a close economy, people make their choice of whether to buy or save. When they buy more, the output and income level of the economy increases. In an open economy, people make an additional choice of whether to buy domestic or foreign goods. If they buy domestic goods, then GDP increases. On the contrary, if they buy imports, then the foreign country’s GDP increases. One of the factors that affects trade should be exchange rate. Nominal Exchange Rates This is the price of the domestic currency in terms of the foreign currency, or the price of the foreign currency in terms of the domestic currency. Example: 1USD=7.8HKD, 1GBP=14.6HKD, or 1HKD=1.032MOP, etc. Nominal Appreciation When the price of foreign exchange becomes more expensive, in other words, it takes more local currency to buy the same amount of foreign currency, or the same amount of local currency can only buy less FX, then the foreign currency appreciates. Example: from 100HKD=106RMB to 100HKD=102RMB, RMB appreciates. Nominal Depreciation When the price of foreign exchange becomes cheaper, in other words, it takes less local currency to buy the same amount of foreign currency, or the same amount of local currency can buy more FX, then the foreign currency depreciates. Example: from 1GBP=14.8HKD to 1GBP=14.6HKD, GBP depreciates. Fixed Exchange Rate This is a system in which two or more countries maintain a constant exchange rate. Example: 1USD=7.8HKD, 1HKD=1.032MOP, etc. Revaluation This is an adjustment on the fixed exchange rate level by the authority to make local currency more expensive relative to FX. Example, from 1USD=8.3RMB to 1USD=8.1RMB, then RMB experiences a revaluation against USD. 1
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This note was uploaded on 04/05/2009 for the course ECIF ECIF200 taught by Professor Henry during the Spring '09 term at University of Manchester.

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Intermediate Macroeconomics Ch18 notes - Chapter 18:...

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