9(18)
CHAPTER
Openness in Goods and Financial
Markets
Macroeconomics
ST
1 LEVEL
CHAPTER
9
Openness has three distinct dimensions
1st closed economy
2nd open economy:
Not dealing or trading with rest of world.
Y=C+I+G
Dealing or trading export and
import with rest of world
(Corporation of international trade)
Y=C+I+G+NX(X-IM)
Openness has three distinct dimensions
1. Openness in goods
markets
Free trade but there are
restrictions include
transportation cost ‫تكاليف‬
‫موصالت‬tariffs(tax on imports)
‫ جمارك‬and quotas‫حصص‬
2. Openness in financial
3. Openness in factor
markets:
markets.:
Capital controls place
The ability of firms to choose
restrictions on the
where to locate production,
ownership of foreign assets
and workers to choose
or remittances ‫تحويالت‬
where to work.)land ,labor
‫ التحكم فى انتقال رؤس االموال بوضع‬,capital and entrepreneur
‫حدود لرؤس االموال الجنبية مثال اخرك‬
‫ دوالر فى‬0222 ‫ او‬0222 ‫تحول‬
‫السنة‬
Note that
More restriction lead to more closed economy and less open economy
Resections is the opposite of openness
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How we can measure trade openness?
index of openness in goods market:
is the proportion‫ نسبة‬tradable goods to aggregate output(GDP).
Higher rate of opens to trade mean more open economy(+ve) and less closed economy
(-ve) and vice versa
Example:a nation that had $600 million in exports, $400 million in imports, and GDP of $2,000
million then find trade openness (trade-to-GDP ratio) ?
Figure 1:U.S. Exports and Imports as Ratios of GDP since 1960
1)Exports and imports, which were equal to
5% of GDP in the 1960s, are now equal to
about 12% of GDP which mean that trade
openness increase
2)Both exports and imports as a
percentage of GDP have increased or more
than doubled
At (begging1980)S:
X<M but approximation difference ‫فرق‬
‫ متفارب‬between them so deficit is so small
Through time:
X<M but The difference is expanding ‫فرق‬
‫ زاد‬so deficit increase
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The Choice between Domestic Goods and Foreign Goods
1) whether to buy domestic goods or to buy foreign goods.
When goods
markets are
open,
domestic
consumers
must decide
2) to buy foreign goods. we must unification the currency ‫توحيد‬
‫العملة‬based on which we have deal between 2 countries
EX : US dollar so we must calculate Exchange rate ‫سعر الصرف‬
3)Central to the second decision is the real exchange rate ‫سعر الصرف‬
‫ الحقيقى‬:
price of domestic goods relative to foreign goods
Nominal Exchange Rates (NER)
Nominal exchange rates between two currencies can be quoted in one of two ways:
▪ As the price of the domestic currency in terms of the foreign currency.
▪ As the price of the foreign currency in terms of the domestic currency
the price of the foreign currency ($US) in terms of (in relation to)the
domestic currency (Egyptian pound LE)
‫سعر العملة االجنبية مقومة بالعملة المحلية‬
Nominal
exchange
rates
EX:
$1= 40 Egyptian pound
A)An appreciation of currency:
an increase in the price (exchange rate) of the currency in terms of
another currency
B)A depreciation of currency :
an decrease in the price (exchange rate) of the currency in terms of
another currency
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An appreciation of the domestic
currency
=
A depreciation of the foreign
currency
A depreciation of the domestic
currency
=
An appreciation of the foreign
currency
is an increase in the price(exchange
is a decrease in the price(exchange rate)
domestic currency in terms of the foreign
currency.
rate) of the domestic currency in terms
of the foreign currency.
Example
Example
$1 = 40 LE 1LE=$0.025
$1 = 40 LE 1LE=$0.025
$1=30LE 1LE=$0.033
Here Egyptian pound (LE) appreciation
$1=60LE 1LE=$0.017
Here Egyptian pound(LE) depreciate and
and $US depreciate
$US appreciation
Fixed exchange rates:
When countries
Maintain a constant exchange rate(relationship) between
foreign currency ($US) and domestic currency (Kuwaiti dinar
operate under
KWD)
fixed exchange
A) Revaluations, (rather than appreciations),
rates:
which are increases in the exchange rate,
B) Devaluations, (rather than depreciations),
which are decreases in the exchange rate.
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CHAPTER
The Nominal Exchange Rate between the Dollar and the Pound since 1970
1)From 1960 through time nominal
exchange rate of US dollar is fluctuating
or swings or dancing of the dollar
Although the dollar has strongly
appreciated but has come with large
swings in the especially in the 1980s.
two main characteristics of the figure:
1) Upward trend(sloping) increase in the
exchange rate(an appreciation of the
dollar)
2)The large fluctuations in the exchange
rate :
a very large appreciation of the dollar in the
first half of the 1980s, followed by a large
depreciation later in the decade
From Nominal (NER) to Real Exchange Rates (RER)
Correct nominal exchange rate from prices(inflation)
The real
exchange
Equals the nominal exchange rate times the foreign price level, divided
by the domestic price level.
rate:
NER(E) nominal exchange rate
P = price of U.S. goods in dollars
P
P*
price of British goods in pounds
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Example
iF $1= 2 British sterling pound and The price (CPI) of a in the United States is, say
$40,000 he price(CPI) of the United Kingdom say, £30,000
=2.66
Like nominal exchange rates, real exchange rates move over time:
1) An increase real exchange rate (increase in the relative price of domestic goods in terms
of foreign goods) is called a real appreciation.
2)A decrease real exchange rate(decrease in the relative price of domestic goods in terms
of foreign goods) is called a real depreciation.
Real and Nominal Exchange Rates Between the US and the UK since 1970
1)The difference between curves relate to
difference in prices or CPI
2) trend reflecting higher average inflation
in the United Kingdom than in the United
States,
3)the nominal and the real exchange rates
have moved largely together since 1970
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From Bilateral to Multilateral Exchange Rates
Bilateral exchange rates:
‫أسعار الصرف الثنائية‬
are exchange rates between two countries.
are exchange rates between several countries.
Example
to measure the average price of U.S. goods relative to the
average price of trading partners goods:
multilateral exchange
rates : ‫أسعار الصرف‬
‫متعددة األطراف‬
we use the U.S. share of import and export trade with each
country as the weight for that country,
relative price of foreign goods Via U.S. goods are called :
1)The real multilateral U.S. exchange rate
2)The U.S. trade-weighted real exchange rate.
3) The U.S. real effective exchange rate (REER).
The U.S. Multilateral Real Exchange Rate since 1973
The large real appreciation of U.S. goods
in the first half of the 1980s was followed
by a large real depreciation in the second
half of the 1980s.
This large swing in the 1980s is sometimes
called the “dance of the dollar.”
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Openness in Financial Markets
The purchase and sale of foreign assets implies buying or selling foreign currency
sometimes called foreign exchange.
Openness in financial markets allows:
1) Financial investors to diversify: ‫التنويع‬
to hold both domestic and foreign assets and speculate ‫ يضارب‬on foreign interest rate
movements.
2) Allows countries to run trade surpluses and deficits:
A country that buys more than it sells (trade deficit) must cover (pay) for the difference
by borrowing from the rest of the world.
Questions
1) The trade openness ratio for a nation that had $1500 million in exports, $500 million in imports,
and GDP of $4,000 million would be
A) 0.1.
B) 0.2.
C) 0.5.
D) -0.1.
Answer C
2) The trade openness( trade-to-GDP) ratio is calculated by
A) exports divided by GDP.
B) imports divided by GDP.
C) exports plus imports divided by GDP.
D) exports minus imports divided by GDP.
Answer C
3) A relative measure of the importance of trade is
A) the dollar value of trade.
B) trade as a percentage of GDP.
C) the dollar value of trade adjusted for inflation.
D) trade as a percentage of investment.
Answer B
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4)Figure above show U.S. Exports and Imports as Ratios of GDP since 1960 it indicted that
A)Both exports and imports as a percentage of GDP have decreased
B)Both exports and imports as a percentage of GDP have increased
C)Both exports and imports as a percentage of GDP have not change
Answer B
True or false :
5)More restriction lead to be close to open economy
False
6)An appreciation of the domestic currency is a decrease in the price(exchange rate)
domestic currency in terms of the foreign currency.
False
7)An depreciation of the domestic currency is a decrease in the price(exchange rate) of
the domestic currency in terms of the foreign currency.
True
8)Nominal exchange rates
A)Correct exchange rate from prices(inflation)
B)Equals the exchange rate times the foreign price level, divided by the domestic price level
C)the price of the foreign currency in terms of (in relation to)the domestic currency
D)none of the above
Answer C
9)Under Fixed exchange rates increases in the exchange rate,
A) Revaluations,
B) Devaluations
C)Appreciations
D) depreciations
Answer A
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10)Figure above show Real and Nominal Exchange Rates Between the US and the UK since 1970 The
difference between curves result from
A. difference in prices or CPI
B. difference in output
C. difference in capacity
D. none of the above
Answer A
True & false
11)Figure above show trend reflecting higher average inflation in the United Kingdom than in the
United States
True
12)Figure above show nominal and the real exchange rates have moved largely together since 1970
True
13)Figure above show The U.S. Multilateral Real Exchange Rate since 1973This large swing in the
1980s is sometimes called the………..
A. Fluctuation of the dollar
B. Swing of dollar
C. dance of the dollar
D. all of the above
Answer D
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14) In the U.S., over the past forty years,
A) exports as a percentage of GDP have increased, while imports has a percentage of GDP have decreased.
B) exports as a percentage of GDP have decreased, while imports has a percentage of GDP have increased.
C) both exports and imports as a percentage of GDP have decreased.
D) both exports and imports as a percentage of GDP have increased.
E) both exports and imports as a percentage of GDP have remained constant.
Answer: D
15) The ratio of a country's exports to its GDP must
A) be greater than one.
B) be less than one.
C) equal the ratio of imports to GDP.
D) be larger than the ratio of imports to GDP.
E) none of the above
Answer: E
16)When the dollar appreciates relative to the pound, the pound price of the dollar
A) increases.
B) decreases.
C) does not change.
D) increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.
Answer: A
17)suppose there is a real depreciation of the dollar. Which of the following may have occurred?
A) foreign currency has become more expensive in dollars.
B) foreign goods have become more expensive to Americans.
C) the foreign price level has increased relative to the U.S. price level.
D) all of the above
E) none of the above
Answer: D
18)Suppose that over the past decade, U.S. inflation is less than that in Mexico. Further assume
that during this same period, the dollar depreciates relative to the Mexican peso. Given this
information,
A) the real exchange rate remains unchanged.
B) the real exchange rate must decrease.
C) the real exchange rate must increase.
Answer: B
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