Foreign Exchange Trade

Balance of Payments

summary of a country’s international trade

the balance of payments is made up of two accounts. The current account and the financial account.

Balance of trade

trade surplus = x<M

trade deficit = X> M

Current account

1. trades in goods and services: difference between a a nation’s export of goods and services adnd its imports of goods and services

2. investment income- income from the factors of production including payments made to foreign investors

3. net transfers- money flows from the private and public sectors

Net capital outflow

difference between the purchase of foreign assets and domestic assts purchased by foreigners

Surplus = Inflow > Outflow

Deficit= Inflow < Outflow

Appreciation

the increase of value of a country’s currency with respect to a foreign currency

x decreases so m increases

Depreciation

the loss of a value of a country’s currency with respect to a foreign currency

x increases so m decreases

demand for currency

at high exchange rates—> people demand fewer US dollars

at lower exchange rates, people demand greater quantities of US dollars

supply of currency

high exchange rates—> people supply high quantity of US dollars

at low exchange rates —> people supply a law quantity of US dollars

foreign exchange trade market

FOREX shifters

1. changes in tastes

2. changes in relative incomes

3. changes in inflation

4. changes in interest rate