GLOBAL ECONOMY
Chapter 1
Surplus
An amount of something left over when requirements have been met, to have more than what is needed
Dollarization
The process a foreign country changing their currency to the US dollar
Deficit
The amount by which something, (like money), is not enough
Having expenditures that exceed income or assets
Expenditure
The action of spending funds
Income
Money received on a regular basis, for work or through investments
Chapter 2
Arbitrage: the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset
No-arbitrage condition: a situation in which all relevant assets are priced appropriately and there is no way for one's gains to outpace market gains without taking on more risk
Depreciation: a decrease in the value of an asset over time
Equilibrium: a state in which opposing forces or influences are balanced
Appreciation: an increase in the value of an asset over time
Chapter 3
The inflation differential: the difference between the inflation rate in one country and the inflation rate in another.
Demand for money: the desired holding of financial assets in the form of cash in hand, or deposited in a bank rather than placed in investments.
Integrated market: in international trade markets, both markets must offer items at the same price in each respective currency
Quantity theory of money: the demand for money is proportional to dollar income. This can also be defined that changes in price correspond to change in the supply of money.
Law of one price: identical goods sold in different locations must sell for the same price when prices are expressed in a common currency.
Money's three functions
Money is a store of value because money can be saved from today to purchase at a later.
Money is a unit of measure in which all prices are quoted.
It is the medium that allows us to buy and sell items.
Money is the most liquid asset of all.
Chapter 4
Short-term interest rates. Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit having maturities of less than one year.
Exchange Rate Expectations: A theory that states that the expected future spot foreign exchange rate t periods from now equals the current t-period forward exchange rate.
Uncovered interest parity (UIP) is a non-arbitrage condition. It states that the nominal interest differential between two countries should be equal to the expected depreciation of the exchange rate.
FX exchange: an over-the-counter market for the trading of currencies. It also determines foreign exchange rates.
Risky arbitrage: an investment strategy that attempts the successful completion of mergers and acquisitions.
Chapter 5
In an open economy, GDP does not need to equal GNE.
In an open economy, the true level of disposable income is best measured by gross national disposable income therefore, Y = GNDI = GNI + NUT.
A closed economy is characterized by a circular flow of payments
Gross national expenditure (GNE), the total expenditure on final goods and services in calendar year. It is made up of three parts: personal consumption C, investment I, and government spending G. The sum equals GNE.
In an open economy, GDP need not equal GNI because imports and exports received by domestic residents need not be the same as factor payments made by domestic firms. Thus, GNI = GDP + NFIA.
Chapter 6
Technical efficiency is how productive a business can be, given the fewest resources necessary to do the job.
Social efficiency is the optimal distribution of resources in society, taking into account all costs and benefits
Convergence is the idea that poorer economies' per capita incomes will tend to grow at faster rates than richer economies.
Diversification occurs when countries have not only income from their own capital stock, but also income streams from capital stocks located in other countries
Home bias occurs when countries hold greater amount of investments in their own country as compared to their holdings in other countries
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Chapter 7
Beggarthy-neighbor policies: self-defeating attempts to improve one country’s economy at the expense of everybody else’s
Monetary policy implements changes through changes in the money supply
Fiscal policy involves changes in government spending or taxes
Expenditure switching: when spending patterns change in response to changes in the real exchange rate, due to changing from foreign purchases to domestic purchases
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Uncovered interest parity condition: the home interest rate must equal the foreign interest rate under a fixed exchange rate.
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Chapter 8
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Fear of floating: when a country prefers a fixed exchange rate to a floating exchange rate regime.
Beggar-thy-neighbor policy: refers to international trade policy that benefits the country that enacted it, while harming its neighbors or trade partners.
Revaluation: adjustment of the value of a currency in relation to other currencies.
Asymetric shock: When an economic event affects one economy or part of an economy more than another.
Devaluation: the reduction in the official value of a currency in relation to other currencies
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Chapter 9
An exchange rate crisis would be a “big” depreciation that occurs after a peg breaks
A fixed exchange rate that always operates with reserves equal to 100% of the money supply is known as a currency board system
In the private sector, if banks and other financial institutions face adverse shocks, they may become insolvent, causing them to close or declare bankruptcy: this is known as a banking crisis
In the public sector, if the government faces adverse shocks, it may default and be unable or unwilling to pay the principal or interest on its debts: this is known as a sovereign debt crisis or default crisis
Define central bank balance sheet:
The domestic debt and foreign reserves purchased by the central bank are its assets, B + R. The money supply issued by the central bank M is its liabilities.
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Chapter 10
As market integration rises, the efficiency benefits of a common currency increase
As symmetry rises, the stability costs of a common currency decrease.
Optimum Currency Area theory says that if either market integration or symmetry increases, the net benefits of a common currency will rise. If the net benefits are negative, the home country would stay out, based on its economic interests. If the net benefits turn positive, the home country would join based on its economic interests.
The euro convergence criteria are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency.