International Trade and Finance

Module 41: Capital Flows and the Balance of Payments

• Balance of payments accounts is the summary of a country’s transactions with other countries

  • Amount of money gained + amount of money lost = 0

• The current account is made up of goods and services, factor income, and transfers

• The financial account is made up of assets/financial capital inflow and liabilities/outflow

  • Difference between a country’s sales to foreigners and foreign purchases

  • Real estate, stocks, and bonds

  • Capital flow

• Payments to and from foreigners make up factor income

• International transfers are funds sent from one country’s residents to another

• Bonds lend money to the government to get it back later

• The balance of payments on goods and services is the difference between the value and exports and imports during a given period

• The trade balance is the difference between a country’s exports and imports

  • Only includes goods and not services

• Capital is goods used to produce other goods

• In foreign direct investment, companies build factories or acquire assets abroad

• The equilibrium interest rate is the intersection of supply curve for loanable funds

• Financial capital flows into countries with higher interest rates and out of those with lower interest rates

• Two-way capital flows are common between economies

Module 42:

• The foreign exchange market is the market where currencies are traded

• Exchange rates are the prices at which currencies trade

• When a currency’s value increases in terms of others, it appreciates

  • Exports fall and imports rise

• When a currency’s value decreases in terms of others, it depreciates

  • Exports rise and imports fall

• The equilibrium exchange rate is where currency quantity demanded is equal to currency quantity supplied

• When demand for one currency changes, there is a corresponding change in the supply of the other currency

• Real exchange rates are exchange rates adjusted for international differences in aggregate price levels

  • Other kind is nominal exchange rates

  • Accounts for differences in inflation rates

• The aggregate price level is the general price of all goods and services over time

• Purchasing power parity is the nominal exchange rate where something would cost the same price in each country

  • Ex: 1,000 pesos = $100

• Increase in interest rates cause real exchange rates to decrease