AP Macroeconomics - Unit 6

Trade Surplus

Exporting more than is imported.​

Trade Deficit

(aka. trade gap) Exporting less than is imported.​

Balance of Payments (BOP)

summary of a country’s international trade within a given year prepared in the domestic country’s currency. made up of two accounts. The current account (CA) and the capital and financial account (CFA).​

Capital and Financial Account

measures the purchase and sale of financial assets abroad.​

Purchases of things that continue to earn money​

In the Current Account

1. Trades in Goods and Services (Net Exports)​

2. Investment Income​

3. Net Transfers

Net Capital Outflow​

The difference between the purchase of foreign assets and domestic assets purchased by foreigners.​

Financial Account Surplus

Inflow > Outflow ​

Financial Account Deficit

Inflow < Outflow​

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CA + CFA = 0 Why balance?

If one has a deficit, the other must have a surplus. ​

Money that leaves a country must come back as either foreign purchases of goods/services (exports) or foreign purchases of financial assets. ​

When one country buys more exports than it imports, that ‘extra’ money is used by foreigners to purchase domestic financial assets. ​

Depreciation

The loss of value of a country's currency with respect to a foreign currency.​

Appreciation

The increase of value of a country's currency with respect to a foreign currency.​

Foreign Exchange Shifters​

1. Changes in Tastes

2. Changes in Relative Incomes

3. Changes in Relative Price Level

4. Changes in Relative Interest Rates

Currency and Net Exports​

Appreciation → Net Exports ↓​

Depreciation → Net Exports ↑​