{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter18 - Chapter 18 Openness in Goods and Financial...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 18 Openness in Goods and Financial Markets Measure of Openness: Ratio of exports to GDP. In USA, it is 11%. Another measure is the ratio of exports to tradable goods. Tradable goods are goods like cars and computers. Tradable goods excludes goods such as houses and haircuts. Sixty percent of total GDP are tradable goods. U.S. has lowest export ratio among the industrialized countries. Two reason for this are distance from other countries and the size of the economy. Export Ratio of Industrialized Countries: USA 11% UK 27% Japan 11% Switzerland 45% Germany 33% Netherland 76%
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 18 Openness in Goods and Financial Markets Openness in Goods Markets: The ability of consumers to choose between domestic and foreign goods. No country has a completely open economy. Most countries resort to tariffs, quotas, and other types of restrictions. Openness in Financial Markets: The ability of investors to choose between domestic assets and foreign assets. Most countries are trying to eliminate capital controls and move towards open capital markets. Openness in Factor Markets: The ability of firms to choose where to operate and the ability of workers to choose where to work. Countries try to have free trade areas. However, movements of plants and labor have resulted in heated political debates in most countries.
Image of page 2
Chapter 18 Openness in Goods and Financial Markets Foreign Exchange Rate: The price of one country’s currency in terms of another country’s. Internal perspective quote: $1.00 = 125.11 yen. External perspective quote: 1 yen = $ 0.008 . Note: The two are identical. However, the one that we often use in U.S. is the external perspective quote. Spot Market: Purchase and sale of foreign currency for immediate delivery. Forward Markets: Purchase and sale of foreign currency to be delivered in the future. Exchange Market: Like any other market, demand for and supply of dollar decide the international value of the dollar ( exchange rate). Demand for Dollar: Demand for dollar is the result of trade with other countries ( exports ). As trade in goods and services or capital transactions with other countries take place, the payments are settled by trading the currencies of the trading countries.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 18 Openness in Goods and Financial Markets Demand for Imports: Demand for imports is a function of income (GDP) and exchange rate: M = f(Y, E) + + where, M is imports, Y is GDP or income, and E is the real exchange rate. A higher value of dollar makes foreign goods relatively cheaper, leading to increase in imports. Demand for Exports: Demand for exports is a function of income or GDP of foreign countries and exchange rate: X = f(Y , E) Note: Here we define exchange rate as the price of dollar in terms of foreign currency. Increase in the exchange rate implies appreciation of dollar and decrease in exchange rate implies depreciation of dollar. In other words, strong dollar means higher E and weak dollar means smaller E.
Image of page 4
Chapter 18 Openness in Goods and Financial Markets Demand for Dollars: Quantity Demanded for dollar is inversely
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern