Chapter 31: Open-Economy
(F) Day of the week: Friday Class: IS206 Created Time: July 3, 2020 2:17 PM Database: Class Notes Database Date: July 3, 2020 2:17 PM Days Till Date: Passed Last Edited Time: June 9, 2021 10:42 AM Type: Lecture
Trade Deficit: import > export
Trade Surplus: import < export
Exchange Rate
Appreciation: increase in value of a currency measured by the currency’s power to buy another currency.
Depreciation: decrease in value of a currency measured by the currency’s power to buy another currency.
Nominal Exchange Rate
the rate at which one country’s currency trade for another country’s currency
Real Exchange Rate
The rate at which G&S of one country trade for the G&S of another country
Real Exchange Rate =
where
P = domestic price
P* = Foreign price
e = Nominal exchange rate
💡 Real Exchange Rate shows different value for the same product reflects the standard of living.
Law of One Price
the notion that a good should sell for the same price in all markets
if not, Arbitrage will buy at low price and sell at high price.
More demand for low price and less demand for high price cause both prices to move closer to the same.
Purchasing Power Parity (PPP)
Every product in the world should have equal price