As i remember the Q set, it was said that each indicator should be considered independently (holding others constant). I can be wrong in recalling that.
PPP doesnt take into account interest rates. PPP is strictly based on inflation for dep / app. IRP is based on interest rates.
+1^
A positive capital flow balance implies that investments coming into a country from foreign sources exceed the investments that are leaving that country for foreign sources. As inflows exceed outflows for any given country, there is a natural demand for more of that country’s currency. This demand causes the value of that currency to increase because a foreign investor must change his currency into the domestic currency where he is depositing his money.
A negative capital flow balance indicates that investments leaving a country for foreign sources exceed investments coming into a country from foreign sources. When there is a negative capital flow, there is less demand for that country’s currency, which causes it to lose value. This is because the investor must sell his local currency to buy the domestic currency where he is depositing his money.
Capital flow was positive but lower than last year inflow.
Is FDI/GDP a way of indicating real FDI i.e. FDI in constant dollars? An increase/ decrease in real FDI would cause an appreciation or decrease in currency value. Therefore, no need to adjust for changes in GDP.
An absolute dollar value of FDI, unless listed in constant dollars, doesn’t allow for inter-year comparisons.
Yes, you are right about NET capital flows resulting from FDI. It was said either NET or BALANCE there?
*An increase/ decrease in real FDI would cause an appreciation/ decrease in currency value.
Hence, we are talking about relative values of the FDI inflows (changes by year as % of GDP). If it is expected as such, then nothing is said about the other account of the financial account - expected outflow of FDI?
What I mean is that real FDI matters in order to make inferences about exchange rate movements over time, not nominal FDI. FDI/GDP is a real FDI indicator, therefore no need to make adjustments i.e. if FDI/GDP descreases through time, the real value of FDI decreases and the currency depreciates.
But, what do I know…
hmmm
Not sure we resolved the issue w.r.t. CF and Forex movements. Anybody else want to take a shot?
*FDI not CF
I want. Practice Problems for Reading 18, page 111, and then the answers. A common approach given in the answers to the economic data changes is to TRACK the rate of change in an appropriate estimate. Then, if the rate is decelarating the answers suggest a worsening.