Balance of Payments, Exchange Rate Systems & Foreign Exchange Market

Flashcards covering key concepts and vocabulary related to Balance of Payments, Exchange Rate Systems, and the Foreign Exchange Market.

Balance of Payments (BoP)

Record of all economic transactions between residents of one country and the rest of the world.

Current Account

Part of the BoP that includes exports, imports, income, and transfers.

Capital Account

Part of the BoP that includes investments, loans, and asset transfers.

Official Reserves

Gold and foreign currencies held by central banks.

Double-entry bookkeeping

A system where every credit has a matching debit.

Credits (+)

Currency inflows in the Balance of Payments.

Debits (−)

Currency outflows in the Balance of Payments.

Current Account Surplus

A situation where a nation saves more than it invests domestically.

Current Account Deficit

A situation where a nation invests or spends more than it saves.

Exchange Rate

The price of one currency in terms of another.

Spot Rate

The immediate exchange rate for currencies, typically within 2 days.

Forward Rate

An exchange rate set today for future delivery.

Fixed/Pegged Rate

A currency rate maintained by the government against another currency.

Floating Rate

A currency value determined by supply and demand.

Appreciation

An increase in currency value.

Depreciation

A decrease in currency value.

Devaluation

An official lowering of a pegged currency rate.

Revaluation

An official increase of a pegged currency rate.

Bid

The price at which a bank buys foreign currency.

Ask

The price at which a bank sells foreign currency.

Spread

The difference between the ask and bid prices.

Arbitrage

Profit from buying currency in one market and selling in another.

Central Bank Role

Intervenes to stabilize currency value or control inflation.

Percent Change Formula

(New − Old) / Old × 100.

Forward Premium/Discount Formula

(F − S) / S × (360 / n) × 100.

Cross Rate

Calculated using the rates of two different currencies with respect to a third currency.