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Questions and Answers
Which of the following equations represents how Net Exports (NX) is calculated in the fundamental macro equation?
Which of the following equations represents how Net Exports (NX) is calculated in the fundamental macro equation?
- NX = GDP - (C + I + G)
- NX = X - IM (correct)
- NX = C + I + G
- NX = AE + Y
In 2023, the US Real GDP components included net exports of goods and services. Given the provided data, what was the approximate value of these net exports in billions of chained 2017 dollars?
In 2023, the US Real GDP components included net exports of goods and services. Given the provided data, what was the approximate value of these net exports in billions of chained 2017 dollars?
- -2506
- -925.5 (correct)
- 3431
- 925.5
Based on the provided data for 2023, which component contributed the most to the US Real GDP?
Based on the provided data for 2023, which component contributed the most to the US Real GDP?
- Net exports of goods and services
- Gross private domestic investment
- Personal consumption expenditures (correct)
- Government purchases
What does the nominal exchange rate represent?
What does the nominal exchange rate represent?
If the RMB/dollar exchange rate moves from 7 to 6, what does this indicate?
If the RMB/dollar exchange rate moves from 7 to 6, what does this indicate?
Suppose the yen/dollar exchange rate is 130 in January and increases to 142.6 by the end of the year. What happened to the value of the dollar relative to the yen during this period?
Suppose the yen/dollar exchange rate is 130 in January and increases to 142.6 by the end of the year. What happened to the value of the dollar relative to the yen during this period?
What does it mean if the yen has depreciated against the dollar?
What does it mean if the yen has depreciated against the dollar?
The Lexus LS made in Japan costs ¥8.4 million. If the yen depreciates from ¥142.6/$1 to ¥200/$1, what happens to the dollar cost of the Lexus LS?
The Lexus LS made in Japan costs ¥8.4 million. If the yen depreciates from ¥142.6/$1 to ¥200/$1, what happens to the dollar cost of the Lexus LS?
What primarily drives the demand for a country's currency in the foreign exchange market?
What primarily drives the demand for a country's currency in the foreign exchange market?
Under what condition is the equilibrium exchange rate achieved in the foreign exchange market?
Under what condition is the equilibrium exchange rate achieved in the foreign exchange market?
What happens if the exchange rate is too high, leading more people to sell $US for yen than wanting to buy them?
What happens if the exchange rate is too high, leading more people to sell $US for yen than wanting to buy them?
What is one factor that can shift the demand curve for foreign exchange to the right?
What is one factor that can shift the demand curve for foreign exchange to the right?
Apart from international trade, what accounts for the majority of the daily volume of international currency transactions?
Apart from international trade, what accounts for the majority of the daily volume of international currency transactions?
How does an increase in the U.S. real interest rate (relative to the rest of the world) typically affect the demand for the dollar and its price?
How does an increase in the U.S. real interest rate (relative to the rest of the world) typically affect the demand for the dollar and its price?
If a country experiences currency appreciation, what is the likely impact on its exports and imports?
If a country experiences currency appreciation, what is the likely impact on its exports and imports?
What is the effect of currency depreciation on the trade balance of a country, assuming other factors remain constant?
What is the effect of currency depreciation on the trade balance of a country, assuming other factors remain constant?
Which of the following would likely cause the U.S. dollar to depreciate relative to the Euro?
Which of the following would likely cause the U.S. dollar to depreciate relative to the Euro?
How does a weaker domestic currency generally affect domestic producers who rely heavily on imported raw materials?
How does a weaker domestic currency generally affect domestic producers who rely heavily on imported raw materials?
If the nominal exchange rate between two countries remains constant, but one country experiences higher inflation than the other, what happens to the real exchange rate?
If the nominal exchange rate between two countries remains constant, but one country experiences higher inflation than the other, what happens to the real exchange rate?
A country increases its exports substantially. How would this likely affect its currency's value given other factors being constant?
A country increases its exports substantially. How would this likely affect its currency's value given other factors being constant?
Assuming a floating exchange rate regime, what is the primary driver of exchange rate movements?
Assuming a floating exchange rate regime, what is the primary driver of exchange rate movements?
Country A’s central bank lowers its interest rates significantly relative to Country B. What is the likely result?
Country A’s central bank lowers its interest rates significantly relative to Country B. What is the likely result?
If international investors become more risk-averse and decide to pull their investments out of emerging markets, what effect does this have on the currencies of those markets?
If international investors become more risk-averse and decide to pull their investments out of emerging markets, what effect does this have on the currencies of those markets?
How would an unexpected increase in import tariffs by a large country likely affect its exchange rate in the short term?
How would an unexpected increase in import tariffs by a large country likely affect its exchange rate in the short term?
When a country devalues its currency, what is it aiming to achieve?
When a country devalues its currency, what is it aiming to achieve?
What could be a consequence of a country consistently undervaluing its currency?
What could be a consequence of a country consistently undervaluing its currency?
If a country's terms of trade improve (i.e., export prices rise relative to import prices), how is its currency likely to be affected?
If a country's terms of trade improve (i.e., export prices rise relative to import prices), how is its currency likely to be affected?
How might an increase in political risk within a country affect its exchange rate?
How might an increase in political risk within a country affect its exchange rate?
In the long run, what relationship is expected between a country's inflation rate and its exchange rate?
In the long run, what relationship is expected between a country's inflation rate and its exchange rate?
Flashcards
What are Net Exports (NX)?
What are Net Exports (NX)?
The difference between a country's total value of exports and total value of imports.
What is Gross Domestic Product (GDP)?
What is Gross Domestic Product (GDP)?
The total value of goods and services produced within a country’s borders during a specific period.
What is the Nominal Exchange Rate?
What is the Nominal Exchange Rate?
The price of one currency in terms of another currency.
What is Currency Appreciation?
What is Currency Appreciation?
An increase in the value of one currency relative to another, making domestic goods more expensive for foreigners.
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What is Currency Depreciation?
What is Currency Depreciation?
A decrease in the value of one currency relative to another, making domestic goods cheaper for foreigners.
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What is the Foreign Exchange Market?
What is the Foreign Exchange Market?
The market in which currencies are traded.
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What is Speculation?
What is Speculation?
The act of trading in a financial asset, involving high risk, in expectation of achieving a profit.
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What is the real interest rate?
What is the real interest rate?
A determinant of the exchange rate. This refers to the interest rate after accounting for inflation.
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What is a Surplus of dollars?
What is a Surplus of dollars?
When the exchange rate is too high, more people will want to sell U.S. dollars for yen than want to buy them.
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What is Currency Appreciation?
What is Currency Appreciation?
An exchange rate that is too low will cause the $US to increase in market value relative to the yen (or generally any other currency).
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Net Exports (NX)
- Net exports are exports minus imports
- Represented as NX in fundamental macro equation: Y = C + I + G + NX
- In 2023, the US had a negative net export of goods and services of -$925.5 billion
- In 2023, Exports were 2506billion,consistingof2506 billion, consisting of 2506billion,consistingof1696 billion in goods and $813.4 billion in services
- In 2023, Imports were 3431billion,madeupof3431 billion, made up of 3431billion,madeupof2838 billion in goods and $597.1 billion in services
- As of 2023, consumption accounted for 68.9% of US Real GDP
- As of 2023, investment accounted for 18.1% of US Real GDP
- As of 2023, government purchases accounted for 17.1% of US Real GDP
- As of 2023, exports accounted for 11.2% of US Real GDP
- As of 2023, imports accounted for 15.3% of US Real GDP
Exchange Rates
- Exchange rates, nominal exchange rate, prices of imported goods, foreign exchange market, and interest rates are all influential to net exports
Nominal Exchange Rate
- Nominal Exchange Rate is is the price of one currency in terms of another currency
- The nominal exchange rate equals the number of units of foreign currency per unit of domestic currency
Nominal Exchange Rate Example: RMB/Dollar
- The RMB/dollar exchange rate is about 7
- The price of $1 is 7 yuan
- E (exchange rate) = is the number of yuan per dollar, which is 7
Nominal Exchange Rate Example: Yen/Dollar
- The current yen/dollar exchange rate is about 142.6
- One dollar costs ¥142.6
- The number of yen per dollar is 142.6
- In January 2023, the exchange rate was E = 130
- It took 130 yen to buy $1 in January 2023
- Since January 2023, the dollar has appreciated, costing ¥142.6
Expressing Exchange Rates With The US Dollar
- Exchange rates can be expressed as units of foreign currency per dollar
- For example, ¥142.6/1and7yuan/1 and 7 yuan/1and7yuan/1
- Exchange rate can be expressed as dollars per unit of foreign currency
- For example, ¥142.6/1=1 = 1=.007/¥1 and 7 RMB / 1=1 = 1=.14 / 1 yuan
Exchange Rates and Imported Goods Price Relation
- The Lexus LS is made in Japan and costs about ¥8.4 million
- If E = ¥142.6/1,theLexusLScostsabout¥8.4Millionor1, the Lexus LS costs about ¥8.4 Million or 1,theLexusLScostsabout¥8.4Millionor58,906
- If the yen depreciated to ¥200 = 1,theLexusLSwouldcost¥8.4M/200=1, the Lexus LS would cost ¥8.4 M/200 = 1,theLexusLSwouldcost¥8.4M/200=42,000
- If the yen appreciated to ¥90 = 1,theLexusLSwouldcost¥8.4M/90=1, the Lexus LS would cost ¥8.4 M/90 = 1,theLexusLSwouldcost¥8.4M/90=93,333
Foreign Exchange Market Equilibrium
- Market exchange rates are determined by supply and demand
Demand for US dollars
- Foreign firms/households wanting to buy goods/services made in the US
- Foreign firms/households wanting to invest in assets or physical properties in the US
- Currency traders who believe the value of the $US will rise
Foreign Exchange Market Supply and Equilibrium
- The supply of $US is caused by the same factors as demand, only in reverse
- Firms, households, and speculators want to obtain (say) Japanese yen and pay for them with U.S. dollars
- Equilibrium is the exchange rate at which the quantity of dollars supplied is equal to the quantity of dollars demanded
Exchange Rates vs Foreign Exchange Market: Appreciation Vs Depreciation
- If the exchange rate is too high, more people will want to sell $US for yen than want to buy them, resulting in a surplus
- The exchange rate will depreciate as the value of the $US will fall relative to the value of the yen
- An exchange rate that is too low will cause the $US to appreciate, increasing relative to the yen or other currency
Changes in the Demand and Supply of Foreign Exchange
- Anything that influences the demand for foreign exchange will shift the demand curve
- Shifts to the right with increasing demand, shifts to the left with decreasing demand
- Possible shifts the demand factors
- Changes in the demand for U.S.-produced goods/services relative to foreign-produced goods/services
- Changes in the desire to invest in the U.S. relative to foreign countries
- Changes in currency trader expectations of the future value of $US relative to foreign currencies
- The supply of USforyenisthesameasthedemandforyenforUS for yen is the same as the demand for yen for USforyenisthesameasthedemandforyenforUS; the same factors that change demand also change supply
Causes of Exchange Rate Fluctuation
- In 2023, international currency transactions totaled $1 Trillion per day
- Only 2%-5% of the daily volume of international currency transactions was international trade
- Worldwide Trade in assets and speculation contributed to 95% - 98% of the daily volume of international currency transactions.
- One of the most important determinants is real interest rate (r)
- r us ↑ (relative to r in the rest of the world)
- Demand ↑ for $-denominated assets
- Demand ↑ for $
- Price ↑ of a dollar
- Thus, E ↑
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