Principles of Macroeconomics

Net capital outflow refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

 (A Swiss resident buys stock in the Cadbury’s corporation and an American buys stock in Nestlé.)

The nominal exchange rate is the rate at which a person can trade the currency of one country for the currency of another.

 The nominal exchange rate is expressed in two ways:
 In units of foreign currency per one Swiss Franc.
 And in units of Swiss Francs per one unit of the foreign currency.

Appreciation refers to an increase in the value of a currency as measured by the amount of foreign currency it can buy.

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

The real exchange rate is the rate at which a person can trade the goods and services of one country for the goods and services of another.

The real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy.

The real exchange rate is a key determinant of how much a country exports and imports.

A depreciation (fall) in the Swiss real exchange rate means that Swiss goods have become cheaper relative to foreign goods. This encourages consumers both at home and abroad to buy more Swiss goods and fewer goods from other countries. As a result, Swiss exports rise, and Swiss imports fall, and both of these changes raise Swiss net exports. Conversely, an appreciation in the Swiss real exchange rate means that Swiss goods have become more expensive compared to foreign goods, so Swiss net exports fall.

The purchasing-power parity theory is the simplest and most widely accepted theory explaining the variation of currency exchange rates.

If the purchasing power of the dollar is always the same at home and abroad, then the exchange rate cannot change.

The nominal exchange rate between the currencies of two countries must reflect the different price levels in those countries.

Purchasing-power parity is 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.

But:

Many goods are not easily traded or shipped from one country to another.

Tradable goods are not always perfect substitutes when they are produced in different countries.

courages people to save

discourages people to invest and to buy assets.

NCO also represents the quantity of country A's currency available on the foreign exchange market, and as such can be viewed as the supply-half that determines the real exchange rate, the demand-half being demand for A's currency in the foreign exchange market. As can be seen in the graph, NCO serves as the perfectly inelastic supply curve for this market. Thus, changes in the demand for A's currency (e.g. change from an increase in foreign demand for products made in country A) only cause changes in the exchange rate and not in the net amount of A's currency available for exchange.

• drive up interest rate
• recude the supply of loanable funds
• crowd out domestic investements
• cause net capital outflow to fall.

A trade policy is a government policy that directly influences the quantity of goods and services that a country imports or exports.

Because they do not change national saving or domestic investment, trade

policies do not affect the trade balance.

Capital flight descripes the process of foreign investors selling there domestic assets of a country, for example because of a political crisis within the country. 

This increases the net capital outflow --> which increases the demand of loanable funds (loanable funds = domestic investement + net capital outflow)

Okun’s law states that in order to keep the unemployment rate steady, real GDP needs to grow at or close to its potential.

 There is a time-lag between any downturn in economic activity and a rise in unemployment and vice versa.

 Unemployment is a therefore a lagged indicator.

Recession is a period of declining real incomes and rising unemployment.
 The technical definition gives recession occurring after two successive quarters of negative economic growth.

 Depression is a severe recession.

 Business cycle is the study of the fluctuations in economic growth around the trend growth.

Comovement refers to the movement of pairs of variables.
 Economists compare another economic variable such as inflation or employment

with GDP over time and see if any relationship can be determined.
 Procyclical is a variable that is above trend when GDP is above trend.

 Real wages is an example – it tends to increase faster during booms
 Countercyclical is a variable is that is below trend when GDP is above trend.

 Unemployment is an example since unemployment tends to fall as GDP grows.

In keynesian model: employement, inflation and real wages are procyclical but unemployement countercyclical

new classical model: employement, inflation procyclical but real wages and unemployement countercyclical

real business cycles models: employement, labour productivity and real wages are procyclical

• A leading indicator can be used to foretell future changes in economic activity.

•  A lagging indicator occurs after changes in economic activity have occurred.

•  A coincident indicator occurs at the same time as changes in economic activity.

he deflationary or output gap is the difference between full employment output and expenditure when expenditure is less than full employment output.

The inflationary gap is the difference between full employment output and actual expenditure when actual expenditure is greater than full employment output.

describe world as it is, descriptive analysis

statement how the world should be, prescriptive analysis

efficiency means that a society gets gets the most, that it can from its scarce resources

equity means that benefits of this resources are fairly distributed among members of society

what you give up to obtain item

when market fails to allocate resources efficiently

may happen when: externality or market power

gross domestic product: GDP is the total market value of all final goods and services produced within a country in a given period of time. (excludes items that are sold illicitly, items that are produced and used at home, never enter marketplace)

Marginal changes are small, incremental adjustments to an existing plan of action 

• Economic growth - the increase in the inflation adjusted value of goods and services produced in an economy over a period of time. 

Productivity is the amount of goods and services produced from each hour of a

worker’s time 

Inflation is an increase in the overall level of prices in the economy

One cause of inflation is the growth in the quantity of money

When the government creates large quantities of money, the value of the money falls 

Inductive reasoning refers to the process of observation from which patterns might be formed which

provides evidence for a hypothesis which may lead to a theory. 

Deductive reasoning begins with a theory from which a hypothesis is drawn. The hypothesis is then subject to observation and either confirmation or rejection. 

its easier to measure total consumption, total investement and total governement purchases and then in the end subtract those who happen in foreign countries

Consumption (C): The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I): The spending on capital equipment, inventories, and structures, including new housing 

Government Purchases (G): The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services.

Net Exports (NX): Exports (X) minus imports (M).