Chapter 26 - Exchange rates, international trade & capital flows

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power parity

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Purchasing (PPP): theory that nominal exchange rates are deter mined as necessary for the law of one price to hold.

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U.S.

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households and firms supply dollars to the foreign exchange market to acquire foreign currencies, which they need to purchase foreign goods, services, and assets.

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43 Terms

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power parity

Purchasing (PPP): theory that nominal exchange rates are deter mined as necessary for the law of one price to hold.

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U.S.

households and firms supply dollars to the foreign exchange market to acquire foreign currencies, which they need to purchase foreign goods, services, and assets.

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Appreciation

: increase in the value of a currency relative to other currencies.

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Depreciation

: decrease in the value of a currency relative to other currencies.

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Trade deficit

: when imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period.

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tight monetary policy

A(n) raises the real interest rate, increasing the demand for dollars, reducing the supply of dollars, and strengthening the dollar.

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Trade

balance= net exports: value of a country's exports less the value of its imports in a particular period (quarter or year)

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Nominal exchange rate

: rate at which two currencies can be traded for each other.

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Trade surplus

: when exports exceed imports, the difference between the value of a country's exports and the value of its imports in a given period.

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Capital inflows

: purchases of domestic assets by foreign households and firms.

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Nominal exchange rate

rate at which two currencies can be traded for each other

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Appreciation

increase in the value of a currency relative to other currencies

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Depreciation

decrease in the value of a currency relative to other currencies

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Flexible exchange rate

exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market

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Foreign exchange market

market on which currencies of various nations are traded for one another

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Fixed exchange rate

exchange rate whose value is set by official government policy

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Market equilibrium value of the exchange rate

exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market

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Real exchange rate

price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency

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Law of one price

if transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations

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Purchasing power parity (PPP)

theory that nominal exchange rates are deter mined as necessary for the law of one price to hold

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Trade balance = net exports

value of a country's exports less the value of its imports in a particular period (quarter or year)

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Trade surplus

when exports exceed imports, the difference between the value of a country's exports and the value of its imports in a given period

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Trade deficit

when imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period

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International capital flows

purchases/sales of real and financial assets across international borders

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Capital inflows

purchases of domestic assets by foreign households and firms

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Capital outflows

purchases of foreign assets by domestic households and firms

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Net capital inflows

capital inflows minus capital outflows

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Nominal exchange at rate

Rate at which two currencies can be traded for each other

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Appreciation

Increase in the value of a currency relative to other currencies

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Depreciation

Decrease in the value of a currency relative to other currencies

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Flexible exchange rate

Exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market

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Foreign exchange market

Market on which currencies of various nations are traded for one another

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Fixed exchange rate

Exchange rate whose value is set by official government policy

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Real exchange rate

Price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency

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Law of one price

If transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations

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Purchasing power parity (PPP)

Theory that nominal exchange rates are deter mined as necessary for the law of one price to hold

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Trade balance = net exports

Value of a country's exports less the value of its imports in a particular period (quarter or year)

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Trade surplus

When exports exceed imports, the difference between the value of a country's
exports and the value of its imports in a given period

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Trade deficit

When imports exceed exports, the difference between the value of a country's
imports and the value of its exports in a given period

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International capital flows

Purchases/sales of real and financial assets across international borders

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Capital inflows

Purchases of domestic assets by foreign households and firms

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Capital outflows

Purchases of foreign assets by domestic households and firms

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Net capital inflows

Capital inflows minus capital outflows