Unit 6: Open Economy - International Trade & Finance

Balance of Payments Accounts

A comprehensive record of a country's economic transactions with the rest of the world over a specific period, including trade in goods and services, financial transfers, and capital movements.

Current Account

A component of the Balance of Payments that records a country's trade in goods and services, income earned from investments, and current transfers.

Balance of Payments on Goods and Services

A sub-account of the Balance of Payments that specifically tracks the value of exports and imports of goods and services.

Merchandise Trade Balance (Trade Balance)

The difference between a country's exports and imports of goods, indicating whether it has a trade surplus or deficit.

Financial Account

A component of the Balance of Payments that records a country's transactions in financial assets and liabilities, including investments and loans.

Foreign Exchange Market

A global marketplace where currencies are traded, determining exchange rates and facilitating international trade and investment.

Exchange Rates

The value of one currency expressed in terms of another, influencing international trade and investment.

Appreciates

Indication that domestic currency has risen in value and purchasing power relative to others, reducing exports.

Depreciates

Indication that domestic currency has dropped in value and lost purchasing power relative to others, increasing exports.

Equilibrium Exchange Rate

The exchange rate at which the quantity of currency demanded equals the quantity supplied in the foreign exchange market.

Real Exchange Rate

The rate at which one country's currency can be exchanged for another, adjusted for price level differences. Demonstrates the purchasing power between countries.

Purchasing Power Parity

A theory stating that in the long run, exchange rates should adjust so that identical goods have the same price in different countries, reflecting the relative purchasing power of currencies.

Exchange Rate Regime

The system by which a country manages its currency in relation to other currencies, determining how exchange rates are set and adjusted.

Fixed Exchange Rate

Exchange rate where the currency of one country is linked to that of another’s or to a commodity good such as gold or oil.

Floating Exchange Rate

The exchange rate is determined by the market of supply and demand of other countries, relative to their currencies.

Exchange Market Intervention

The central bank takes action to influence the value of its currency in the foreign exchange market, often through buying or selling currencies.

Foreign Exchange Reserves

Assets held by a central bank in foreign currencies, used to back liabilities and influence exchange rates.

Foreign Exchange Controls

Regulations imposed by a government to limit or control the exchange of its currency with foreign currencies, often to stabilize the economy.

Devaluation

The reduction of a currency's value relative to other currencies, typically implemented by a government to increase export competitiveness.

Revaluation

The increase in the value of a currency relative to others, often resulting from government or central bank actions.