Chapter 11

• What is the law of one price?

  The same good will sell for the same price in both markets
• What are the 2 primary forms of economic integration?

  Trade and flow of factors of production
• What does Autarky refer to?

  A situation in which a country does not interact automatically with the rest of the world
• What is GDP?

  The total income earned by the factors of production located in a country
• What is GNP?

  The total income earned by the factors of production owned by the residents of a country
• What are the 2 main factors that have influenced globalization?

  Transport Costs and Transmission of information
• What are the 2 most important forms of trade restrictions?

  Tariffs and Quotas
• What is the largest channel through which physical capital flows across national border?

  Foreign Direct Investment
• What is a foreign direct investment?

  A foreign firm buying or building a facility in another country.
• What is the second largest channel for physical capital flow

  Portfolio Investment
• What is portfolio Investment

  A foreign investor buying stocks or bonds in another country
• What 3 assumptions are made for the Solow model here?

  -In an economy open to capital flows, the rental rate for capital will be the same as in the rest of the world

  -Human capital effect is ignored

  -The economy under analysis is small, so any change here has no effect on the rest of the world
• True/False:In a closed economy, the level of GDP per worker depends on the savings rate, so high savings = richer in the steady state

  True
• True/False: A country with a high savings rate in an open economy experiences an increase in GDP and a decrease in GNP

  False
• What is used to calculate the degree of openness in a free-capital flow model?

  Savings retention coefficient
• What is the savings retention coefficient?

  Tells you the fraction of every additional dollar of savings that end up as additional domestic investment
• What is the savings retention coefficient in a closed economy?

  1
• What is investment dependent on in a free capital flow model?

  Productivity
• True/False: In a free capital flow model, investment is dependent on savings

  False