Theme 2 CC7 Definitions

Balance of payments

The record of all international transactions between the individuals and entities (including government) of that country and other countries during a specific time period

Current account

Records payments for trade in goods and services plus net flows of primary and secondary income

Capital account

Shows transactions in fixed assets such as the sale/transfer of patents, copyrights, franchises, leases, and other transferable contracts. Also includes the transfer of ownership of fixed assets such as land and debt forgiveness

Financial account

Records payments for the international purchase and sale of financial assets - something which is owned in order to yield a financial gain

Trade balance

The difference between the value of exports and the value of imports

International competitiveness

The ability of an economy to compete fairly and successfully in markets for internationally traded goods and services that allows for rising standards of living over time

Hot money flows

Short term, high speed capital flows that move in and out of countries in response to changing economic and financial conditions, often driven by investment opportunities and market expectations and influenced by interest rate differentials, currency exchange rates, and political and economic stability

Exchange rate

The value of a currency in terms of another

Bilateral exchange rate

The rate of exchange of one single currency for another single currency

Effective exchange rate/ trade weighted exchange rate index

A measure of the exchange rate of a country’s currency against a basket of currencies of a country’s major trading partners

(exchange rate) Depreciation

A fall in the value of a currency in terms of other currencies due to market forces

(exchange rate) Appreciation

A rise in the value of a currency in terms of other currencies due to market forces

(exchange rate) Devaluation

A fall in the value of a currency in terms of other currencies due to a policy of a government or central bank

(exchange rate) Revaluation

A rise in the value of a currency in terms of other currencies due to a policy of a government or central bank

Marshall Lerner Condition

A condition that states that a currency depreciation will lead to an improvement in the current account so long as the combined price elasticities of exports and imports are greater than 1

J-curve

Diagram showing the possible time lags between a falling currency value and an improved trade balance (represents the Marshall Lerner Condition)

Global trade imbalance

Occurs when some countries run persistent surpluses on their trade accounts and others experience persistent and often large external deficits