Current Account and Currency Dynamics

Flashcards covering key concepts related to the current account, currency appreciation and depreciation, trade dynamics, and balance of payments.

Current Account

Tracks trade in goods/services, net investment income, and net transfers.

Current Account Surplus

Occurs when exports are greater than imports.

Capital/Financial Account

Tracks ownership of assets like stocks, bonds, and real estate.

Current Account Deficit Effect

The capital account will have a surplus to balance the balance of payments.

Currency Appreciation

A situation where a currency gets stronger and buys more foreign currency.

Impact of Currency Appreciation on Trade

Exports decrease while imports increase.

Currency Depreciation

A situation where a currency gets weaker and buys less foreign currency.

Cause of Capital Inflow

Higher domestic interest rates attract foreign investment.

Effects of Trade Restrictions

Reduce imports, help domestic producers, but may cause inefficiencies.

Nominal Exchange Rate vs. Real Exchange Rate

Nominal is the market rate; real is adjusted for price levels (inflation).

Real Exchange Rate Calculation

Nominal ER multiplied by (Domestic Price Level / Foreign Price Level).

Comparative Advantage

When a country produces something at a lower opportunity cost.

Effects of Currency Depreciation on Trade

Exports increase while imports decrease.

Movements in the FOREX Market

Driven by supply and demand, interest rates, inflation, and preferences for goods.

Balance of Payments Accounts

Always balance because a deficit in one account corresponds to a surplus in another.