The Exchange Rate and The Balance of Payments

Vocabulary flashcards covering key concepts related to the exchange rate and balance of payments in macroeconomics.

Foreign Currency

Money of another country, including bank notes, coins, and deposits, used in international transactions.

Foreign Exchange Market

A marketplace where currencies are traded, allowing one currency to be exchanged for another.

Exchange Rate

The price at which one currency can be exchanged for another currency.

Currency Depreciation

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

Currency Appreciation

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

Demand in Foreign Exchange Market

Determined by exchange rate, world demand for exports, interest rates, and expected future exchange rates.

Law of Demand for Foreign Exchange

The demand for dollars is derived from the desire to purchase U.S.-produced goods, implying higher exchange rates reduce quantity demanded.

Exports Effect

The relationship whereby a lower exchange rate increases the value of U.S. exports, raising the demand for U.S. dollars.

Expected Profit Effect

The expectation of profit from holding U.S. dollars increases demand when the current exchange rate is lower.

Supply in Foreign Exchange Market

Determined by the quantity of U.S. dollars traders plan to sell at a given exchange rate, influenced by several economic factors.

Imports Effect

The principle that higher value of U.S. imports increases the supply of U.S. dollars in the foreign exchange market.

Market Equilibrium

Occurs when the exchange rate settles at a level where the demand for and supply of U.S. dollars are equal.

Interest Rate Parity

A financial theory stating that the difference in interest rates between two currencies reflects the expected change in exchange rates.

Purchasing Power Parity (PPP)

The theory that currencies should have the same purchasing power in different countries; based on the cost of goods.

Arbitrage

The practice of profiting from price differences in different markets by buying and selling equivalent goods.

Balance of Payments Accounts

Records a country's international transactions including trade, investments, and loans, divided into current, capital, and official settlements accounts.

Current Account

Part of the balance of payments that records exports and imports of goods and services, net interest income, and net transfers.

Net Borrower

A country that borrows more from the rest of the world than it lends.

Net Lender

A country that lends more to the rest of the world than it borrows.

Debtor Nation

A country that has historically borrowed more from the rest of the world than it has lent.

Creditor Nation

A country that has historically invested more in the rest of the world than other nations have invested in it.