Unit 11: Open Economy - International Trade and Finance Study Guide

Flashcards about open economy, international trade and finance.

Why does the balance of payments always equal zero?

Because every international transaction has an equal and opposite entry in either the current or capital/financial account.

What causes a country's currency to appreciate or depreciate?

Changes in supply and demand for the currency in the foreign exchange market cause appreciation or depreciation.

How does a change in currency value affect imports and exports?

Appreciation decreases exports and increases imports, while depreciation increases exports and decreases imports.

What three components make up the current account (CA)?

Net exports, net income from abroad, and net unilateral transfers make up the CA.

Why can a country run a CA surplus or deficit?

Because exports, income, and transfers may not equal imports and outflows.

What is the balance of trade, and how is it related to the CA?

The balance of trade is net exports, a major part of the current account.

What does the capital and financial account (CFA) include?

It includes purchases and sales of assets and capital transfers between nations.

Why can the CFA show a surplus or a deficit?

Because financial capital can either flow into or out of the country.

What does a CFA surplus indicate?

It indicates that more financial capital is entering the country than leaving.

What does a CFA deficit indicate?

It means more capital is leaving the country than coming in.

What is the purpose of the balance of payments (BOP)?

To record and track all of a country’s international economic transactions.

Why must the CA and CFA always sum to zero in the BOP?

Because every inflow (credit) must be matched by an outflow (debit), ensuring balance.

What is a credit in the BOP?

A transaction that brings money into the country.

What is a debit in the BOP?

A transaction that sends money out of the country.