AP Macroeconomics - Unit 6: Open Economy- International Trade and Finance

balance of payments accounts

A record of all economic transactions between residents of a country and the rest of the world during a specific period.

current account

A part of the balance of payments that records the trade of goods and services, income, and current transfers.

balance of payments on goods and services

The difference between a country's exports and imports of goods and services.

merchandise trade balance (trade balance)

The difference between the value of a country's exports and imports of goods.

financial account

A part of the balance of payments that records transactions involving the purchase or sale of assets, such as investments and loans.

foreign exchange market

A global decentralized market for trading currencies.

exchange rates

The value of one currency for the purpose of conversion to another.

appreciates

When a currency increases in value relative to another currency.

depreciates

When a currency decreases in value relative to another currency.

equilibrium exchange rate

The exchange rate at which the quantity of a currency demanded equals the quantity supplied.

real exchange rate

The exchange rate adjusted for differences in price levels between countries.

purchasing power parity

A theory stating that in the long run, exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.

exchange rate regime

The way a country manages its currency in relation to other currencies and the foreign exchange market.

fixed exchange rate

A currency system in which the value of a country's currency is tied to the value of another currency or a basket of currencies.

floating exchange rate

A currency system in which the value of a currency is allowed to fluctuate according to the foreign exchange market.

exchange market intervention

Actions taken by a government's central bank to influence the value of its currency in the foreign exchange market.

foreign exchange reserves

Actions taken by a government's central bank to influence the value of its currency in the foreign exchange market.

foreign exchange controls

Government restrictions on the purchase or sale of foreign currencies.

devaluation

A deliberate downward adjustment to the value of a country's currency relative to another currency or a standard.

revaluation

A deliberate upward adjustment to the value of a country's currency relative to another currency or a standard.