FOREx

Balance of Trade

net exports (exports − imports)

Trade Surplus

exports > imports

Trade Deficit

exports < imports

Balance of Payments (BOP)

record of ALL international transactions (goods, services, assets) in a year

Balance of Payments (BOP)

measured in domestic currency (e.g., US dollars for US)

Balance of Payments (BOP)

made of current account + financial (capital) account

Financial Account

records purchase and sale of financial assets abroad

Financial Account

includes foreign direct investment (buying businesses/factories in another country)

Foreign Direct Investment

when a foreign company buys or builds a business in another country

Net Capital Outflow

domestic purchases of foreign assets − foreign purchases of domestic assets

Financial Account Surplus

capital inflow > outflow

Financial Account Deficit

capital inflow < outflow

Foreign Exchange Market (FOREX)

market where currencies are traded

Exchange Rate

price of one currency in terms of another currency

Currency Depreciation

decrease in value of a currency relative to another currency (needs more units to buy foreign currency)

Currency Appreciation

increase in value of a currency relative to another currency (needs fewer units to buy foreign currency)

Weak Currency

currency that has depreciated

Strong Currency

currency that has appreciated

Currency Demand

desire to hold/buy a foreign currency

Currency Supply

amount of a currency being sold in exchange for another

FOREX Rule

if you demand one currency, you supply your own currency

Changes in Tastes

shifts in preferences that affect currency demand

Tourism into a country

increases demand for that country’s currency → currency appreciates

Increase in Domestic Income

increases imports → increases demand for foreign currency → domestic currency depreciates

Higher Domestic Prices

increases imports → increases demand for foreign currency → domestic currency depreciates

Higher Foreign Interest Rates

attracts foreign capital inflow → increases demand for foreign currency → foreign currency appreciates

Exchange Rate Regime

system that determines currency value (fixed or floating)

Fixed Exchange Rate

government sets/manages currency value

Floating Exchange Rate

market determines currency value

Export Promotion Policy

some governments try to depreciate currency to increase exports