Unit 6: Open Economy – Intl Trade & Finance

balance of payments accounts

a summary of a country’s transactions with other countries

balance of payments on the current account (current account)

a country’s balance of payments on goods and services plus net international transfer payments and factor income

balance of payments on goods and services

a country’s difference between the value of its exports and the value of its imports during a given period

merchandise trade balance (trade balance)

the difference between a country’s exports and imports of goods

balance of payments on the financial account (financial account)

a country’s difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period

foreign exchange market

what currencies are traded in

exchange rates

are the prices at which currencies trade

appreciates

when a currency becomes more valuable in terms of other currencies

depreciates

when a currency becomes less valuable in terms of other currencies

equilibrium exchange rate

the exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied

real exchange rates

are exchange rates adjusted for international differences in aggregate price levels

purchasing power parity

between two counties’ currencies is the nominal exchange rate which a given basket of goods and services would cost the same amount in each country

exchange rate regime

a rule governing policy toward the exchange rate

fixed exchange rate

a country has it when the government keeps the exchange rate against some other currency at or near a particular target

floating exchange rate

a country has it when the government lets the exchange rate go wherever the market takes it

exchange market intervention

government purchases or sales of currency in the foreign exchange market constitute

foreign exchange reserves

are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market

foreign exchange controls

are licensing system that limit the right of individuals to buy foreign currency

devaluation

a reduction in the value of a currency that is set under a fixed exchange rate regime

revaluation

an increase in the value of a currency that is set under a fixed exchange rate regime

protectionism

the practice of limiting trade to protect domestic industries

tariffs

taxes on imports

import quota

a limit on the quantity of a good that can be imported within a given period