Chapter18

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

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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%
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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.
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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.
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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.
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This note was uploaded on 10/15/2009 for the course BUAD 350 taught by Professor Safarzadeh during the Summer '07 term at USC.

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

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