Unit 6 Vocab

Balance of Payment Accounts

A record of all economic transactions between a country and the rest of the world over a period of time

Current Account

Tracks trade in goods and services, income (like interest/dividends), and transfers (foreign aid, remittances)

Balance of Payments on Goods and Services

The part of the current account that includes exports and imports of goods and services only

Merchandise Trade Balance (Trade Balance)

The difference between exports and imports of physical goods

Financial Account

Records cross-border purchases of assets (stocks, bonds, real estate, etc.)

Foreign Exchange Market

The market where currencies are bought and sold

Exchange Rates

The price of one currency in terms of another

Appreciates

When a currency increases in value relative to another currency

Depreciates

When a currency decreases in value relative to another currency

Equilibrium Exchange Rates

The exchange rate where the quantity of currency demanded equals the quantity supplied

Real Exchange Rate

The rate at which goods and services can be exchanged between countries (adjusted for price levels)

Purchasing Power Parity (PPP)

The theory that exchange rates adjust so identical goods cost the same in different countries

Exchange Rate Regime

The system a country uses to manage its currency (fixed, floating, etc.)

Fixed Exchange Rate

A system where the government or central bank pegs its currency to another currency or standard

Floating Exchange Rate

A system where exchange rates are determined by market forces (supply and demand)

Exchange Market Intervention

When a government or central bank buys/sells currency to influence the exchange rate

Foreign Exchange Reserves

Holdings of foreign currencies by a central bank used to manage exchange rates

Foreign Exchange Controls

Government restrictions on buying/selling foreign currencies

Devaluation

A deliberate decrease in the value of a currency under a fixed exchange rate system

Revaluation

A deliberate increase in the value of a currency under a fixed exchange rate system