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MACROECONOMICS:
BASIC CONCEPTS
CHAPTER 31
THE INTERNATIONAL FLOWS
OF GOODS AND CAPITAL
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THE FLOW OF GOODS:
EXPORTS, IMPORTS, AND NET EXPORTS
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Net Exports (TRADE BALANCE): the difference between the
value of a country’s exports and the value of its imports.
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Factors that might influence a country’s exports, imports and net
exports:
1. The tastes of consumers for domestic and foreign goods.
2. The prices of goods at home and abroad.
3. The exchange rates at which people can use domestic currency
to buy foreign currencies.
4. The incomes of consumers at home and abroad.
5. The cost of transporting goods from country to country.
6. Government policies toward international trade.
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THE FLOW OF FINANCIAL RESOURCES:
NET CAPITAL OUTFLOW
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The identity:
NX = NCO
Small question:
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SAVING, INVESTMENT AND THEIR RELATIONSHIP
TO THE INTERNATIONAL FLOWS
In an open economy:
Domestic
investment
National
saving
Net capital
outflow
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CONCLUSION
Trade Deficit Balanced Trade Trade Surplus
Exports < Imports Exports = Imports Exports > Imports
Net Capital Outflow < 0 Net Capital Outflow = 0 Net Capital Outflow > 0
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What does a positive VN net capital inflow indicate?
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THE PRICES FOR
INTERNATIONAL
TRANSACTION
Real and Nominal
Exchange Rates
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NOMINAL EXCHANGE RATE:
The rate at which a person can trade the
currency of one country for the currency of
another.
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NOMINAL EXCHANGE RATE
Update: 2/2/2019
Source: Sacombank
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Appreciation Depreciation
• An increase in the value of • A decrease in the value of
a currency as measured by a currency as measured
the amount of foreign by the amount of foreign
currency it can buy. currency it can buy.
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EXERCISE
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REAL EXCHANGE RATE:
The rate at which a person can trade goods and services
of one country for the goods and services of another.
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FORMULA:
(e × P)
REAL EXCHANGE RATE =
P* Where:
P: price index for a domestic basket
P*: price index for a foreign basket
e: nominal exchange rate between the
domestic currency and foreign currency
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EXAMPLE:
400.000VND/t-shirt $20/t-shirt
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Nominal exchange rate × Domestic price
FORMULA: Real exchange rate =
Foreign price
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Nominal exchange rate × Domestic price
FORMULA: Real exchange rate =
Foreign price
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Nominal exchange rate × Domestic price
FORMULA: Real exchange rate =
Foreign price
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CONCLUSION
According to above example
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A FIRST THEORY OF EXCHANGE-RATE
DETERMINATION:
PURCHASING-POWER PARITY
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2
CONTENT
1.Concept
2.The basic logic
3.Implications
4.Limitations
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CONCEPT
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THE BASIC LOGIC OF PURCHASING-POWER PARITY (PPP)
The LOP asserts that if there is a price difference between the two markets
There will be unexploited profits People take advantage of these
profits (arbitrage) Eventually, the price is the same in two markets.
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SUMMARY IN FIGURES
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IMPLICATIONS OF PURCHASING-POWER PARITY
Suppose that:
P is the price of a basket of goods in country A ( measured in A )
P* is the price of a basket of goods in country B ( measured in B )
e is the nominal exchange rate ( the number of B A can buy)
For the purchasing power of A to be the same in the two countries:
1 e
=
P P*
e×P
1= P*
P*
e=
P
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KEY IMPLICATION
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IMPLICATION
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LIMITATIONS OF PURCHASING-POWER PARITY
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EXERCISE
A soda can costs $0.75 in the U.S and 15.000 VND in
Vietnam. A nominal exchange rate is recorded to be
20.000 VND per dollar.
a. What is the real exchange rate between U.S and Vietnam soda can?
b. If purchasing-power parity holds, what will happen to the nominal and
real exchange rate?
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SUMMARY
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THE INTERNATIONAL FLOWS OF GOODS AND CAPITAL
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THE INTERNATIONAL FLOWS OF GOODS AND CAPITAL
NX=NCO
Finance
domestic
investment
An economy’s
saving
Net capital
outflow
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A FIRST THEORY OF EXCHANGE-RATE DETERMINATION:
PURCHASING-POWER PARITY
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A FIRST THEORY OF EXCHANGE-RATE DETERMINATION:
PURCHASING-POWER PARITY
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THANK Y U