Chapter 16: International Finance and the Exchange Rate

Vocabulary practice flashcards covering international trade, global financial flows, nominal and real exchange rates, currency supply and demand, and the balance of payments.

International Trade

The buying and selling of goods and services across national borders.

Exports

Goods or services produced domestically and purchased by foreign buyers.

Imports

Goods or services produced in a foreign country and purchased by domestic buyers.

Globalization

The increasing global integration of economies, cultures, political institutions, and ideas.

Financial Inflows

Investments by foreigners in the domestic economy, such as foreign purchases of domestic assets.

Financial Outflows

Investments made by domestic citizens or businesses in foreign countries.

Foreign Direct Investment (FDI)

A form of international financial investment involving physical assets, such as a foreign company building a new manufacturing facility in another country.

Portfolio Investment

A form of financial flow where investors purchase foreign stocks or bonds rather than physical operating assets.

Capital Controls

Government rules and regulations designed to limit the flow of money and assets across international borders.

Nominal Exchange Rate

The price of one country's currency expressed in terms of another country's currency, calculated as $\frac{\text{Number of units of foreign currency}}{\text{Number of dollars}}$.

Currency Appreciation

An increase in the value or price of a currency relative to another currency, making foreign imports cheaper and domestic exports more expensive for foreign buyers.

Currency Depreciation

A decrease in the value or price of a currency relative to another currency, making foreign imports more expensive and domestic exports cheaper for foreign buyers.

Trade-Weighted Index

A summary index measuring the international value of a currency against a basket of currencies, where each foreign currency is weighted based on that nation's importance as a trading partner.

Foreign Exchange Market

The global market where individuals, businesses, and governments buy and sell currencies, determining equilibrium nominal exchange rates through supply and demand.

Floating Exchange Rate

An exchange rate regime where the value of a currency is determined purely by private market forces of supply and demand without direct government fixing.

Fixed Exchange Rate

An exchange rate regime where the government pegs the currency's value to another currency or standard and maintains it at a constant level.

Managed Exchange Rate

An exchange rate regime where the government actively intervenes by buying and selling currency to stabilize volatility or maintain an artificially low currency price.

Real Exchange Rate

The relative price of domestic goods compared to foreign competitors, given by the formula $\frac{\text{Domestic price in dollars}}{\text{Foreign price converted into dollars}}$.

Balance of Payments

An accounting framework summarizing all economic and financial transactions between a country's residents and the rest of the world, composed of the current account and financial account.

Current Account Balance

The difference between cross-border income received from abroad and cross-border income paid to residents of other countries ($\text{Income from abroad} - \text{Income paid abroad}$).

Financial Account Balance

The difference between cross-border capital entering a nation and capital exiting ($\text{Financial inflows} - \text{Financial outflows}$), reflecting changes in asset ownership.

Current Account Deficit

The condition where cross-border income paid abroad exceeds income received from abroad, reflecting an economy where total spending exceeds national income ($C + I + G > Y$) and investment exceeds national saving ($I > S$).

Financial Account Surplus

The condition where foreign purchases of domestic assets exceed domestic purchases of foreign assets, generating net capital inflows that offset a current account deficit.

Bilateral Trade Balance

A measure of the value of goods and services imported from a specific country compared to the value of goods and services exported directly to that same country.

International Trade

The buying or selling of goods and services across national borders.

Exports

Goods or services produced domestically and purchased by foreign buyers.

Imports

Goods or services produced in a foreign country and purchased by domestic buyers.

Globalization

The increasing global integration of economies, cultures, political institutions, and ideas.

Financial Inflows

Investments made by foreign individuals, businesses, or governments in the domestic country (such as the United States).

Financial Outflows

Investments made by domestic citizens or companies (such as Americans) in foreign countries.

Foreign Direct Investment (FDI)

A form of international financial flow that involves direct investment in physical assets, such as building a factory or manufacturing plant abroad.

Portfolio Investment

A financial flow that occurs when investors buy foreign financial assets, such as stocks or bonds, without gaining direct physical operational control.

Capital Controls

Government rules and regulations designed to limit the flow of money and financial assets across national borders.

Nominal Exchange Rate

The price of one country's currency stated in terms of another country's currency ($\text{Nominal Exchange Rate} = \frac{\text{Foreign Currency Units}}{\text{Domestic Currency Units}}$).

Currency Appreciation

An increase in the price or value of a currency relative to other currencies, enabling one unit of that currency to buy more foreign currency.

Currency Depreciation

A decrease in the price or value of a currency relative to other currencies, causing one unit of that currency to buy fewer units of foreign currency.

Trade-Weighted Index

A summary measure tracking the overall value of a currency (such as the U.S. dollar) against a basket of foreign currencies, weighted by each nation's trade importance.

Foreign Exchange Market

The international market where currencies are bought and sold, with the equilibrium nominal exchange rate determined by currency supply and demand.

Floating Exchange Rate Regime

An exchange rate regime where the currency's exchange value fluctuates freely in response to market supply and demand forces without government pegging.

Fixed Exchange Rate Regime

An exchange rate regime where the government sets an official exchange rate that rarely or never changes relative to an anchor currency.

Managed Exchange Rate Regime

An exchange rate system where the government actively buys and sells currency to limit volatility or maintain a cheap currency value.

Real Exchange Rate

A measure comparing the domestic price of goods to their foreign competitors' price converted into domestic currency ($\text{Real Exchange Rate} = \frac{\text{Domestic Price in Dollars}}{\text{Foreign Price in Dollars}}$).

International Competitiveness

The relative price advantage of domestic goods over foreign goods; it rises when the real exchange rate falls, increasing exports and reducing imports.

Balance of Payments

A macroeconomic accounting framework summarizing a country's total economic and financial transactions with the rest of the world over a specified period.

Current Account

A record of cross-border income flows each year, including exports, imports, investment income payments, and unilateral receipts.

Current Account Balance

The difference between cross-border income received from abroad and cross-border income paid abroad ($\text{Current Account Balance} = \text{Income from Abroad} - \text{Income Paid Abroad}$).

Financial Account

A balance of payments category tracking international movements of financial capital and tallying up net changes in foreign asset ownership.

Financial Account Balance

The net difference between financial investment inflows from abroad and financial investment outflows to foreign nations ($\text{Financial Account Balance} = \text{Financial Inflows} - \text{Financial Outflows}$).

Current Account Deficit

A condition occurring when income paid abroad exceeds income received from abroad, reflecting an excess of total domestic spending over domestic income ($C + I + G > Y$) or investment over national saving ($I > S$).

Financial Account Surplus

A situation where foreign purchases of domestic assets exceed domestic purchases of foreign assets, generating net capital inflows that offset a current account deficit.

Bilateral Trade Balance

The specific difference between the dollar value of goods and services a nation imports from one individual country versus exports to that same country.