Chapter 38: The Balance of Payments, Exchange Rates, and Trade Deficits

Foreign aid

________ and pensions are included because they can be thought of as the financial flows that accompany the exporting and importing of goods and services.

exchange rate

A(n) ________ determined by market forces can, and often does, change daily.

Credits

________ generate flows of money into the country, debits cause flows of money out of the country.

Instability

________- Flexible exchange rates may destabilize the domestic economy because wide fluctuations stimulate and then depress industries producing exported goods.

Currency interventions

________- Governments manipulate an exchange rate through the use of official reserves.

Uncertainty

________ and diminished trade- The risks and ________ associated with flexible exchange rates may discourage the flow of trade.

downward sloping

The demand for a currency is ________, while the supply of a currency is upward- sloping.

Relative price

________ level changes- Changes in the ________ levels of two nations may change the demand and supply of currencies and alter the exchange rate between the two nations currencies.

Official reserves

________- Consists of foreign currencies, reserves held with the International Monetary Fund, and stocks of gold.

Trade deficit

________- Imports exceed exports.

Terms of trade

________ changes- A decline in the international value of its currency will worsen a nations ________.

Balance of payments

________- The sum of all the financial transactions that take place between its residents and the residents of foreign nations.

Flexible exchange rates

________ automatically adjust and eventually eliminate balance- of- payments deficits or surpluses.

federal government

Exchange controls- The government requires that all currency from another country obtained by US exporters must be sold to the ________.

exchange rate

Changes in tastes- Any change in consumer tastes or preferences for the products of a foreign country may alter the demand for that nations currency and change its ________.

Trade deficits

________ show that there are automatic and unavoidable asset transfers.

International trade

Purchasing or selling currently produced goods or services across an international border

International asset transactions

The transfer of the property rights to either real or financial assets between the citizens of one country and the citizens of another country

Balance of payments

The sum of all the financial transactions that take place between its residents and the residents of foreign nations

Organized into 2 sections

the current account and the capital and financial account

Current account

The section of the balance of payments that summarizes trade in currently produced goods and services

Balance of trade on goods

The difference between its exports and its imports of goods

Balance on goods and services

The difference between a countrys exports of goods and services and their imports of goods and services

Trade deficit

Imports exceed exports

Trade surplus

Exports exceed imports

Balance of current account

The total of all transactions in the current account

Capital and financial account

A countrys international asset transactions

Balance on the capital and financial account

Sum of the deficit on the capital account and the surplus on the financial account

Official reserves

Consists of foreign currencies, reserves held with the International Monetary Fund, and stocks of gold

Balance of payments deficit

A nation must make an in-payment of official reserves to its capital and financial account in order to balance it with the current account

Balance of payments surplus

An out-payment of official reserves from the capital and financial account must occur to balance that account with the current account

Flexible (or floating) exchange rate system

Demand and supply determine exchange rates and in which no government intervention occurs

Fixed exchange rate system

Governments determine exchange rates and make necessary adjustments in their economies to maintain those rates

Changes in tastes

Any change in consumer tastes or preferences for the products of a foreign country may alter the demand for that nations currency and change its exchange rate

Relative income changes

A nations currency is likely to depreciate if its growth of national income is more rapid than that of other countries

Relative price level changes

Changes in the relative price levels of two nations may change the demand and supply of currencies and alter the exchange rate between the two nations currencies

Purchasing power parity theory

Exchange rates equate the purchasing power of various currencies

Relative interest rates

Changes in relative interest rates between two countries may alter their exchange rate

Changes in relative expected returns on stocks, real estate, and production facilities

Investors in one country must sell their currencies to purchase the foreign currencies needed for the foreign investments

Uncertainty and diminished trade

The risks and uncertainties associated with flexible exchange rates may discourage the flow of trade

Terms of trade changes

A decline in the international value of its currency will worsen a nations terms of trade

Instability

Flexible exchange rates may destabilize the domestic economy because wide fluctuations stimulate and then depress industries producing exported goods

Currency interventions

Governments manipulate an exchange rate through the use of official reserves

Exchange controls

The government requires that all currency from another country obtained by US exporters must be sold to the federal government

Managed floating exchange rates

Exchange rates among major currencies are free to float to their equilibrium market levels, but nations occasionally use currency interventions in the foreign exchange market to stabilize or alter market exchange rates

Balance of payments

The sum of all the financial transactions that take place between its residents and the residents of foreign nations

Current account

The section of the balance of payments that summarizes trade in currently produced goods and services

Balance on goods and services

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

Trade deficit

Imports exceed exports

Trade surplus

Exports exceed imports

Balance of current account

The total of all transactions in the current account

Capital and financial account

A country’s international asset transactions

Balance on the capital and financial account

Sum of the deficit on the capital account and the surplus on the financial account

Official reserves

Consists of foreign currencies, reserves held with the International Monetary Fund, and stocks of gold

Flexible (or floating) exchange rate system

Demand and supply determine exchange rates and in which no government intervention occurs

Fixed exchange rate system

Governments determine exchange rates and make necessary adjustments in their economies to maintain those rates

Purchasing power parity theory

Exchange rates equate the purchasing power of various currencies

Currency interventions

Governments manipulate an exchange rate through the use of official reserves

Exchange controls

The government requires that all currency from another country obtained by US exporters must be sold to the federal government

Managed floating exchange rates

Exchange rates among major currencies are free to float to their equilibrium market levels, but nations occasionally use currency interventions in the foreign exchange market to stabilize or alter market exchange rates