APMacro Unit 6

Balance of Payments Accounts

A summary of all economic transactions between a country and the rest of the world, including trade, income flows, and financial asset purchases.

Current Account

The part of the balance of payments that tracks trade in goods and services, net income from abroad, and net transfers.

Balance of Payments on Goods and Services

The difference between a country’s exports and imports of goods and services.

Merchandise Trade Balance (Trade Balance)

The difference between exports and imports of goods only.

Financial Account

The part of the balance of payments that records the purchase and sale of financial assets between a country and the rest of the world.

Foreign Exchange Market

The market where currencies are bought and sold.

Exchange Rates

The price of one currency in terms of another currency.

Appreciates

When a currency increases in value relative to another currency.

Depreciates

When a currency decreases in value relative to another currency.

Equilibrium Exchange Rate

The exchange rate at which the quantity of a currency supplied equals the quantity demanded.

Real Exchange Rate

The exchange rate adjusted for differences in price levels between countries.

Purchasing Power Parity (PPP)

The theory that in the long run, exchange rates adjust so identical goods cost the same in different countries.

Exchange Rate Regime

A country's system for managing its exchange rate.

Fixed Exchange Rate

An exchange rate system where the government sets and maintains the value of its currency

Floating Exchange Rate

An exchange rate determined by supply and demand in the foreign exchange market with little or no government intervention.

Exchange Market Intervention

Government actions to buy or sell its own currency in the foreign exchange market to influence the exchange rate.

Foreign Exchange Reserves

Stocks of foreign currencies held by a nation’s central bank, used for currency stabilization or international payments.

Foreign Exchange Controls

Government restrictions on buying or selling foreign currency.

Devaluation

A government-caused decrease in the value of a currency under a fixed exchange rate system.

Revaluation

A government caused increase in the value of a currency under a fixed exchange rate system.