Chapter 19: Exchange Rates and the Balance of Payments

This set of flashcards covers key terms and concepts related to exchange rates and the balance of payments as outlined in Chapter 19.

Balance of Payments

A summary record of a country’s transactions with the rest of the world, including the buying and selling of goods, services, and assets.

Foreign-Exchange Market

A market where currencies are traded and the exchange rate is determined by supply and demand.

Current Account

Records transactions arising from trade in goods and services, including net investment income from foreign assets.

Capital Account

Records international transactions in assets, including investments and sales of assets.

Fixed Exchange Rate

An exchange rate maintained within a small range around its stated value by central bank intervention.

Flexible Exchange Rate

An exchange rate that is free to be determined by supply and demand in the foreign-exchange market without government intervention.

Appreciation

An increase in the value of the domestic currency, requiring fewer units of currency to purchase foreign currency.

Depreciation

A decrease in the value of the domestic currency, requiring more units of currency to purchase foreign currency.

Purchasing Power Parity (PPP)

A theory stating that the exchange rate between two currencies adjusts to equalize the price levels of goods and services in different countries.

Capital Outflow

When financial capital exits a country to acquire foreign assets.

Capital Inflow

When financial capital enters a country from the sale of assets to foreigners.

Trade Balance

The difference between merchandise exports and imports, showing a surplus or deficit in trade.

Statistical Discrepancy

An entry in the balance of payments that compensates for measurement inaccuracies.

Economic Shock Absorber

A mechanism (like a flexible exchange rate) that mitigates the effects of economic shocks on output and employment.