ap macro unit 6

balance of payment accounts

a summary of the country's transactions with other countries

current account

a country's balance of payments on goods and services plus net international transfer payments and factor income

trade balance

gap between exports and imports

capital and financial account

the inflow and outflow of funds that impact a country's foreign assets and liabilites

current account is made up of:

1. net exports
2. investment income
3. net transfers

foreign direct investment

Investment made by a foreign company in the economy of another country

net capital outflow

the difference between the purchase of foreign and domestic assets purchased by foreigners

exchange rate

the price at which currencies from different countries are traded

foreign exchange market

a market in which currencies of different countries are bought and sold

exchange rate regime

the system a country uses to establish the exchange rate of its own currency against other currencies

fixed exchange rate

a country ties its official exchange rate to another country's currency

floating exchange rate

where a country's currency price is determined by the forex market

dual exchange rate

a country uses an official fixed exchange rate for imports and exports and current account transactions

currency appreciation

when the value of one country's currency increases in relation to another country's currency

currency appreciation factors:

1. consumer tastes
2. relative inflation
3. relative incomes
4. relative interest rates

currency depreciation

when the value of a currency in a floating exchange rate regime falls

equilibrium exchange rate

the exchange rate where the demand for a currency is equal to the quantity of that currency being supplied

supply of currency

based on a country's demand for imported goods from other countries

disequilibrium

occurs when there is a deficit or surplus in a country's BOP

demand for currency

a direct result of the demand for a country's export goods and investors looking to invest in the country

nominal exchange rate

the rate of exchange that does not account for the difference in aggregate price levels for the same products in two different countries

real exchange rate

the price of domestic goods in terms of foreign goods that accounts for inflation

Smoot-Hawley Act

Increased tariffs in order to limit import competition during the Great Depression

General Agreement on Tariffs and Trade (GATT)

a trade agreement that contained loopholes enabling countries to avoid trade-barrier reduction agreements

World Trade Organization (WTO)

a permanent global institution to promote international trade and to settle international trade disputes

multinational corporations

companies based in more than one country

trade surplus

when a country exports more than it imports

trade deficit

when a country imports more than it exports

appreciation

an increase in value

depreciation

a lessening in value

international capital flows

movement of monetary funds and financial capital between open economies

capital inflow

the net inflow of funds into a country

capital outflow

domestic money invested abroad