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Questions and Answers
What happens when the exchange rate E increases?
What happens when the exchange rate E increases?
Which of the following best describes a spot rate in the context of foreign exchange?
Which of the following best describes a spot rate in the context of foreign exchange?
What defines a forward rate in foreign exchange markets?
What defines a forward rate in foreign exchange markets?
Which statement accurately describes the foreign exchange market?
Which statement accurately describes the foreign exchange market?
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What does the term 'exorbitant privilege' refer to in the context of the U.S. economy?
What does the term 'exorbitant privilege' refer to in the context of the U.S. economy?
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Which market locations are known to concentrate most foreign exchange trading?
Which market locations are known to concentrate most foreign exchange trading?
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What is the major characteristic of the foreign exchange market regarding transaction costs?
What is the major characteristic of the foreign exchange market regarding transaction costs?
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Which of the following best describes the role of the dollar in the foreign exchange market?
Which of the following best describes the role of the dollar in the foreign exchange market?
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What percentage of international transactions involves dollars and some other currencies?
What percentage of international transactions involves dollars and some other currencies?
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Why is the US dollar considered a vehicle currency in forex transactions?
Why is the US dollar considered a vehicle currency in forex transactions?
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What is the typical cost of transaction when converting currencies through the US dollar?
What is the typical cost of transaction when converting currencies through the US dollar?
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What does the uncovered interest parity condition (UIP) describe?
What does the uncovered interest parity condition (UIP) describe?
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If an investor chooses to buy dollars with euros and invests in US Treasury bonds, what must be considered after one year?
If an investor chooses to buy dollars with euros and invests in US Treasury bonds, what must be considered after one year?
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What is needed for an investor to assess the return on an investment between euros and dollars?
What is needed for an investor to assess the return on an investment between euros and dollars?
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How does the economics of currency use mirror language economics?
How does the economics of currency use mirror language economics?
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What is the impact of high liquidity on transaction costs in forex trading?
What is the impact of high liquidity on transaction costs in forex trading?
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What drives the initial depreciation of the exchange rate before its long-term adjustment?
What drives the initial depreciation of the exchange rate before its long-term adjustment?
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What is the Law of One Price (LOP) primarily based on?
What is the Law of One Price (LOP) primarily based on?
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How does an increase in the general level of prices affect the purchasing power of domestic currency?
How does an increase in the general level of prices affect the purchasing power of domestic currency?
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In the context of exchange rates, what does overshooting refer to?
In the context of exchange rates, what does overshooting refer to?
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What is a reason that Purchasing Power Parity (PPP) often fails in the short run?
What is a reason that Purchasing Power Parity (PPP) often fails in the short run?
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What role do transport costs and trade barriers play in the Law of One Price?
What role do transport costs and trade barriers play in the Law of One Price?
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What aspect of economic policy affects the movement from short-run to long-run exchange rates?
What aspect of economic policy affects the movement from short-run to long-run exchange rates?
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Why do firms often engage in 'pricing to market' strategies in open economies?
Why do firms often engage in 'pricing to market' strategies in open economies?
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Study Notes
Financial Globalization and Capital Flows
- Financial globalization is not the same as trade globalization
- Measures of trade openness include (exports + imports)/GDP
- Measures of financial globalization analyze cross-border financial transactions
- De Jure measures examine restrictions on international capital movements
- De Facto measures quantify international financial asset transactions
- Financial assets are used to transfer purchasing power across time periods
- Portfolio investment includes equity and debt
- Foreign direct investment is ownership greater than 10%
- Other investments are bank loans and trade credit
- Derivatives include futures and options
- Reserves are held by central banks
Flows and Stocks
- Flows are the value of assets traded per year
- Stocks are the value of assets held per year
- Stocks are the cumulative total of flows
- Measures include international financial integration (domestic assets held by foreigners + foreign assets held by domestic agents) / GDP
- Inflows are net purchases of domestic assets by foreign investors
- Outflows are net purchases of foreign assets by domestic investors
- Negative capital flows mean people are selling more financial assets than buying
The First Financial Globalization
- World capital markets were highly integrated in the late 19th century
- British wealth invested overseas was significant (17% in 1870, 33% in 1913) surpassing most countries today.
- This was similar for France and Germany.
- Capital outflows from the UK were mainly to the "New World", driven mostly by portfolio investment in infrastructure and resources.
- This involved the purchase of equity and bonds in railroads, harbors etc.
- Factors driving this included increasing transportation and communication improvements (ie telegraph), and the rise of global banking.
Marginal Productivity of Capital (MPK)
- Capital falls when total capital (K) increases.
- MPK measures the additional output generated by adding one extra unit of capital, holding other factors like labor constant.
- MPK generally falls as more capital is added (diminishing marginal returns).
- MPK is a foundational concept in growth theory and production analysis.
The Case for Financial Globalization
- The Washington Consensus was a set of policy recommendations in the early 1990s focused on economic liberalization.
- This often included steps towards reforms, deregulation, and opening economies.
- Many emerging markets opened their capital markets in the early 1990s.
- Most developed markets were already open by the 1980s.
National Accounting and the Balance of Payments
- GDP (Gross Domestic Product) measures the value of final goods and services produced within a country's borders
- GNI (Gross National Income) measures the value of final goods and services produced by the country's factors of production
- GNI = GDP + net receipts of factor income from the rest of the world
- The current account identity relates the current account to saving and investment
- A current account surplus indicates saving exceeds investment
- A current account deficit reflects investment exceeding saving.
The Balance of Payments
- All transactions of a country with the rest of the world are recorded
- The balance of payments must balance (all credits equal debits)
- The BOP registers all transactions with foreign economic agents
- Three main types of transactions include: current account (exports/imports of goods, services), financial account (sale/purchase of financial assets), capital account (certain transfers of wealth).
Financial Globalization
- Financial globalization is the increasing integration of financial markets across countries and leads to certain intertemporal gains from both risk sharing and capital flows.
- It has also been important for enabling efficient allocation of capital
- However, financial globalization is also associated with the possibility of greater risks and vulnerabilities for individuals and countries
- Capital flows to countries with lower capital and vice versa
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Description
This quiz explores the distinction between financial globalization and trade globalization, focusing on various measures of cross-border financial transactions. It examines key concepts like portfolio and foreign direct investment, as well as the significance of flows and stocks in the financial market. Delve into the complexities of financial assets, their roles, and the analysis of international capital movements.
