1. Exam 5
Chapter 32 and 33
Tuesday April 23

2. Chapter 32
The Macroeconomics
of Open Economies

3. Key Terms
closed economy net capital outflow
open economy nominal exchange rate
exports appreciation
imports depreciation
net exports real exchange rate
trade balance purchasing power parity
trade surplus
trade deficit
balanced trade

5. Global Device

6. ARM Holdings
Wolfson
Marvel
Skyworks U.S.
CSR
Linear Technologies U.K.
NXP
National Semiconductor
Germany
Sharp Korea
Samsung
Toshiba Japan
Infineon
Broadcom Taiwan
Numonyx
Micron
China
Dialog Semiconductor
Texas Instruments
STMicroelectronics
Silicon Storage
RF Microdevices
Cirrus Logic

8. Trade can make
everyone better off

9. Open Economy
An economy that
interacts freely with
other economies around
the world

10. Closed Economy
an economy that does
not interact with other
economies around the
world

11. Exports
Goods and services that
are produced
domestically and sold
abroad

12. Imports
Goods and services that
are produced abroad
and sold domestically

13. Net Exports
The value of a nation’s
exports minus the value of
its imports; also called the
trade balance

14. Trade Balance
The value of a nation’s
exports minus the value of
its imports; also called the
net exports

15. Net Exports
= Exports - Imports

17. Trade Surplus
An excess of exports
over imports

18. Trade Deficit
An excess of imports
over exports

19. Balanced Trade
When imports equal
exports

20. Net Capital Outflow
The purchase of foreign
assets by domestic residents
minus the purchase of
domestic assets by
foreigners

21. Foreign Direct
Investment
FDI
Directly investing in
creating a company

22. Foreign Portfolio
Investment
FPI
Buying stock in a foreign
company

23. Nominal Exchange Rate
The rate at which a person
can trade the currency
of one country for the
currency of another

24. Appreciation
An increase in the value
of a currency as measured
by the amount of foreign
currency it can buy

25. Depreciation
A decrease in the value of
a currency as measured
by the amount of foreign
currency it can buy

26. Foreign Exchange Rate
The rate at which a person
can trade the goods and
services of one country for
the goods and services of
another

27. Purchasing Power
Parity
A theory of exchange rates
whereby a unit of any given
currency should be able to buy the
same quantity of goods in all
countries

28. Purchasing Power
Parity
Cost the same around the world?

29. Big Mac Economics
$4.37
x 3.75 = 16.38
3.75 to 1 or .267 to 1
11 SR
x .267 = $2.93
Implied Exchange Rate 4.37 to 11 = 2.52 to 1
Currency is undervalued by 33 percent
Buy Big Macs in Saudi for 11($2.93) and
resell in the U.S. for 16.38 ($4.37) and
make 49% profit