Balance of Payments and Exchange Rates

These flashcards cover key vocabulary terms related to the balance of payments and exchange rate models.

Exports (X)

Goods and services produced domestically that are purchased by foreigners.

Imports (M)

Goods and services produced in foreign countries that are purchased domestically.

Net exports (X – M)

The difference between exports and imports; indicates overall trade balance.

Balance of payments accounts

A record of one country’s trade in goods, services, income, and financial assets with the rest of the world.

Current account

An account of the balance of payments that measures flows of goods, services, income, and unilateral transfers.

Trade surplus

Occurs when the current account is positive, indicating exports exceed imports.

Trade deficit

Occurs when the current account is negative, indicating imports exceed exports.

Capital and financial accounts

Accounts of the balance of payments that measure flows of financial assets.

Double-entry bookkeeping

An accounting technique where each transaction is recorded as a credit and a debit.

Exchange rate

The value of one country’s currency in terms of another.

Currency markets

Markets where currency is exchanged, typically involving large banks.

Appreciation

An increase in the value of a currency in terms of another currency.

Depreciation

A decrease in the value of a currency in terms of another currency.

Purchasing power parity (PPP)

The idea that currencies should have the same purchasing power in different countries.

International arbitrage

Profiting through price differentials by buying in low-priced countries and selling in high-priced countries.

Big Mac Index

An informal measure of purchasing power parity using the price of a Big Mac in different countries.