What is industry-specific risk
Industries can be hit by a common shock
What is industry-specific risk
Industries can be hit by a common shock
What is country-specific risk?
Countries can be hit by adverse shocks which affect all firms/industries within a country at the same time
Why does capital not flow to poor countries? (3)
- marginal returns on capital may be non-decreasing
- differences in taxes, property rights protection, corruption, other institutional factors.
- capital markets are not full integrated
What is Marginal product of capital
MPK indicates how much additional output can be produced with an additional unit of physical capital holding all other production factors constant.
What are exchange controls
Impose restrictions on quantity of foregin exchange
- all foreign exchange is done via a public authority
- foreign currency must be sold at a specific rate
- government allocates rights to buy foreign currency
reduces welfare
How to prevent depreciation?
How to prevent appreciation?
Dep: buy domestic, sell foreign
App: sell domestic, buy foreign
What is permanent peg, adjustable peg and crawling peg?
- fix “forever”
- Fix for a long time but allow for occasional adjustments
- Adjust band frequently in line with economic indicators
What is a dirty/managed float?
flexible exchange rate with some interventions of the government to influence market rate
What are effects of high value of the currency (appreciation)
It hurts exporting and import-competing businesses, but lowers import prices, reducing domestic inflation
What are the effects of a low value of currency (depreciation)
It benefits exporting frims and import-competing firms, but increases import prices, causing domestic inflation
