Term
| absolute purchasing power parity |
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Definition
| posits that a basket or bundle of tradable products will have the same cost in different countries if the costs is stated in the same currency |
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Term
| relative purchasing power parity |
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Definition
| posits that the difference between changes over time in the product-price levels in two countries will be offset by the change in the exchange rate over this time |
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Term
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Definition
| posits that a product that is easily and freely traded in a perfectly competitive global market should have the same price everywhere, once the prices at different places are expressed in the same currency |
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Term
| real effective exchange rate (REER) |
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Definition
| a weighted average relative to the number of other countries. Tries to capture how an exchange rate has changed over time accounting for a change in inflation |
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Term
| nominal effective exchange rate |
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Definition
| weighted-average exchange-rate value of a country's currency |
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Term
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Definition
| exchange rate mechanism, set of fixed currencies among many European states created in 1979 in which currencies could move within a 2.25% band of agreed value. Adjustable peg system. Members had to leave in early 90s because Germany raised their interest rate to fight inflation during a recession and the other countries could not defend their currencies against the fixed exchange rate so they had to devalue and leave |
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Term
| advantages of using your own currency as a reserve currency |
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Definition
| seignorage rights, being able to run a deficit without problems |
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Term
| What leads to a situation in which no arbitrage is possible? |
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Definition
| Market forces will lead people to put pressure on these cross rates until their values are aligned such that no arbitrage profits are possible. (Fall 2007) |
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Term
| Cost of purchasing land for a factory in a foreign state by a US company |
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Definition
| Is cheaper when US currency is stronger, leads to a change in the capital account (2007) |
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Term
| cost for a foreign firm in purchasing an old factory in TX |
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Definition
| Is more expensive when US currency is stronger, leads to a change in the capital account (2007) |
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Term
| sale price of TVs imported to the US |
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Definition
| is cheaper with stronger US $, leads to a change int he current account |
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Term
| cost of US interest repayment to Japanese bank in Japanese yen |
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Definition
| is cheaper when US $ stronger, change in either current or capital account |
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Term
| US stock dividends sent to foreign stock holder |
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Definition
| increases when US $ is stronger, change to the current account |
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Term
| Exchange of US stocks for US bonds by foreign holder |
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Definition
| no change when US $ is stronger, no change |
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Term
| Chinese central bank must purchase 1 billion $ with their yuan |
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Definition
| is more expensive when $ is stronger, change in official foreign reserves |
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Term
| Value of Chinese government scholarship to spend at NYU |
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Definition
| decreases in value when $ stronger, change in the current account |
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Term
| French defense ministry purchase of 1 million USD with Euro to hold for future purchases |
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Definition
| increases when $ is stronger, change in the capital account |
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Term
| Increase in foreign output |
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Definition
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Term
| decrease in expected future spot rate |
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Definition
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Term
| 3% rise in both states' output and 4% increase in their money supply |
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Definition
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Term
| doubling of US inflation, tripling of foreign state inflation |
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Definition
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Term
| increase of US imports from foreign state, no change in exports |
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Definition
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Term
| current account balance equal to |
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Definition
| the difference between domestic product and domestic expenditure, the difference between national saving and domestic investment, net foreign investment |
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Term
| when domestic money supply increases relative to foreign money supply |
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Definition
| domestic currency depreciates in the long-run |
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Term
| Central feature of Bretton Woods was |
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Definition
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Term
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Definition
| exchange rate where government occasionally intervenes to influence the rate. But day to day prices are basically market determined (floats). |
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Term
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Definition
| currency is fixed to another currency. It is only shifted occasionally (once every few years) |
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Term
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Definition
| like a pegged exchange rate, but moves more often. Perhaps every few weeks or months |
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Term
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Definition
| currency tied to several other currencies not just 1 |
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Term
| disadvantages of exchange rate system based on gold |
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Definition
as with fixed exchange countries give up monetary policy
worry about government credibility
higher inflation reduces the competitiveness of goods
changes in supply of gold effect prices/inflation
not as stable as proponents claim
resources would need to be expended to mine gold |
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Term
| Investment position is uncovered when |
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Definition
| there is foreign exchange risk, may lose or gain based on changes in the value of currencies |
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Term
| Situation where one-way speculative gamble is possible |
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Definition
| currency must have a fixed (pegged) exchange rate and you would seek to short the currency that appears overvalued (currency of state with higher inflation) and move into currency of country likely to revalue (increase in value as its inflation rate was lower). The pressure this puts on an exchange rate may make this a self-fulfilling prophecy in other words as speculators attack one currency they make its decline a reality. |
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Term
| increase in expected future spot rate |
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Definition
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Term
| doubling of Canadian inflation, small rise in US inflation |
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Definition
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Term
| increase in domestic output |
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Definition
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Term
| increase of US exports to Canada, no change in imports |
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Definition
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Term
| relative price of primary products is depressed by |
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Definition
| Engle's law and synthetic substitutes |
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Term
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Definition
| the net value of flows of financial assets and similar claims (excluding official international reserve asset flows) |
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Term
| For MNEs to be successful must overcome the inherent disadvantages with one or more |
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Definition
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Term
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Definition
| international agreement to protect endangered species (effective or somewhat effective) |
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Term
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Definition
| international agreement to reduce CFCs or cholorforocarbons (effective) |
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Term
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Definition
| international agreement to reduce global warming and carbon emissions (not effective) |
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Term
| Sugar cartel won't be effective because |
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Definition
substitute forms of sugar
crop varieties by weather in key regions that year
threat of new entrants is high
too many players in the industry |
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Term
| Potential factors that cause US current account deficits |
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Definition
Expansion of the fiscal deficit
decline in the private saving rate
producitivity growth
slump in foreign domestic demand
improvements in global finance intermediation |
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Term
| Advantages of a fixed exchange rate system for a currency tied to the $ |
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Definition
predictability for costs for exporters/importers, can help export sector that sends goods to US
secondarily can bring inflation under control as your export sector is punished for a higher price level |
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Term
| Disadvantages of a fixed exchange rate system for a currency tied to the $ |
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Definition
loss of control over domestic monetary policy or must commit resources to defend it
problem as you are a high inflation country and must periodically adjust currency or work to bring inflation down
currency tied to value of US and anything happening
secondarily inability to adjust to trade with other countries |
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Term
| advantages of a stronger currency |
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Definition
FDI abroad is cheaper
interest payments are lower on foreign debt
imports are cheaper (like oil)
price discipline tends to reduce inflation
foreign travel is cheaper |
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Term
| disadvantages of a stronger currency |
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Definition
| exports more expensive, harder to maintain/prone to crises |
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Term
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Definition
| profits/money made by a state from issuing their own currency |
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Term
| Is gold a useful hedge against inflation |
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Definition
| gold is not a useful hedge because the value of gold has moved around a lot and has not always moved opposite to inflation (e.g. gold doesn't always go up in inflationary times) |
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Term
| Four trends that lead cartels to weaken over time |
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Definition
cheating
sagging demand
new competing supply
declining market share |
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Term
| Internalization advantage |
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Definition
advantages using an asset within a firm rather than finding other firms that will buy, rent, or license the asset
pays to do something internally in firms (why multinationals exist rather than selling/licensing their operations and brands in foreign countries |
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Term
| Domestic inflation increases |
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Definition
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Term
| increase in domestic output |
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Definition
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Term
| decrease in foreign money supply |
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Definition
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Term
| decrease in expected future spot rate |
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Definition
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Term
| when exports are greater than imports |
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Definition
| currency increases/appreciates |
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Term
| if a foreign country experiences infinite hyperinflation, the value of e |
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Definition
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Term
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Definition
| The US has become the consumer/borrower of last result because either (1) weakness in Europe/a weak Euro combined with (2) trade surpluses in Asian or large US current account deficit/lack of savings |
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Term
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Definition
China's growth model based on
state spending/investment
corporate spending/investment
infrastructure investment
construction spending
export led spending
weak consumer spending |
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Term
| US refused to ratify the Kyoto Protocol because |
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Definition
the science was too uncertain to take on such a costly process to reduce emissions
unacceptable that developing countries like China had made no commitments |
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Term
| How to futures contracts differ from forward contracts |
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Definition
futures contract is a standard contract (forward is customized)
without a futures contract there are margin calls (you must provide a margin)
profits and losses on futures contracts accrue daily
anyone can invest in futures (that can put up a margin), whereas forward contracts are only with credit worthy borrowers |
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Term
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Definition
a clause in a bond offering to deal with issues of default (more technically is allows a change in terms if a certain percentage of people agree)
it is important because it facilitates debt restructuring |
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Term
| Proposals to reduce the frequency of financial crises |
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Definition
developing countries should pursue sound macroeconomic policies to avoid creating conditions in which over borrowing or a loss of confidence in government occurs
countries should improve the data that they report publicly to provide sufficient details on total debt and its components, as well as on holdings of international reserves, and they should report data promptly
developing country governments should avoid short-term borrowing denominated in foreign currencies to avoid crises that begin when foreign lenders abruptly demand repayment |
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Term
| What are inherent disadvantages of MNEs |
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Definition
does not initially h ave the native understanding of local laws, customs, procedures, practices, and relationships
firm has extra costs of maintaining management control expensive to operate at a distance, in travel and communications, and especially in misunderstanding
MNE may lack useful connections with political leaders in the foreign country, or it would face actual or potential hostility from the foreign country's government |
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Term
| Situation where a country has positive current account balance and a negative goods and services balance |
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Definition
unilateral transfers (high levels of remittances from nationals working in other states or foreign aid)
or
income from foreign investments greater than income paid to foreigners |
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Term
| decrease in foreign interest rates |
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Definition
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Term
| decrease in domestic inflation |
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Definition
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Term
| increase of foreign exports to domestic country |
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Definition
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Term
| decrease in domestic money supply |
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Definition
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Term
| decrease in domestic output |
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Definition
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Term
| Political crisis in foreign country |
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Definition
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Term
| FDI into domestic country |
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Definition
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Term
| Factors to determine whether a firm should export a good in its home country or use FDI in a new market |
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Definition
comparative advantage
scale economies
government barriers to importing into foreign country
trade blocs (get access to countries in the wider bloc) |
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Term
| The Commanding Heights clip, Hernando De Soto argues that the main factor/condition that developing countries lack that is undermining their growth is |
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Definition
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Term
| If two states create a fixed exchange rate system, what effect will it have on inflation rates in those states? |
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Definition
| it will force the high inflation state to reduce/decrease its inflation rate via the price discipline effect |
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Term
| How did the dollar crisis end? |
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Definition
US left the gold standard or suspended convertibility
Us introduced a two tier system for gold convertibility
Fixed exchange rate system and currency started to float freely |
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Term
| Functions of the interbank operations of the foreign exchange market |
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Definition
provides a bank the means to readjust its own position quickly and at low cost
permits a bank to take on a position in a foreign currency quickly
provides a bank with a continuous stream of information on conditions in the foreign exchange market |
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Term
| special drawing rights (SDRs) |
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Definition
| a ready-made basket of currencies for a country to fix its currency to. It is made up of the four major currencies in the world (US $, Euro, pound, and yen) |
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Term
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Definition
| currency appreciates, current account moves toward deficit (strong currency increases imports, cuts exports), capital account moves toward surplus (high interest rate and booming investment environment attracts foreign inflows) |
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Term
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Definition
| currency depreciates, current account moves toward surplus (weak currency decreases imports, increases exports), capital account moves toward deficit (low interest rate and recessionary climate limits inflows, increases outflows) |
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Term
| Increase domestic interest rate |
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Definition
| e falls (domestic currency appreciates) |
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Term
| decrease domestic interest rate |
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Definition
| e rises (domestic currency depreciates) |
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Term
| foreign interest rate increases |
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Definition
| e rises (domestic currency depreciates) |
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Term
| foreign interest rate decreases |
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Definition
| e falls (domestic currency appreciates) |
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Term
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Definition
| e rises (domestic currency depreciates) |
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Term
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Definition
| e falls (domestic currency depreciates) |
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Term
| increase in foreign money supply |
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Definition
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Term
| increase in foreign output |
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Definition
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Term
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Definition
quantity of imports increases (cheaper)
quantity of exports decreases
cost of imported goods decreases
cost of foreign travel decreases
Cost of FDI decreases
foreign interest payments decrease
to maintain
keep interest rates high
decrease the money supply
sell foreign exchange
not viable in the long term |
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Term
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Definition
quantity of exports increases
quantity of imports decreases
cost of imported goods increases
cost of foreign travel increases
cost of FDI increases
foreign interest payments increase
to main
keep interest rates low
increase money supply
accumulate foreign currency
viable in the long term but with inflation pressure |
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Term
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Definition
World gains b+f
North gains b
Northern workers lose a
Norther employers gain a+b
South loses e
Southern workers gain d
Southern employers lose d+e
Migrant workers gain e+f |
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