Term
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Definition
| Exports – Imports + net unilateral transfers |
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Term
| Merchandise trade balance = |
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Definition
Value of Exports – Value of Imports.
Plus = surplus
Minus = deficit (U.S. between 1990 and 2010) |
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Term
| Net unilateral transfers abroad = |
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Definition
| direct payments from U.S. to other countries. Supplies $/ demands foreign currency. Reverse from foreign countries to U.S. |
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Term
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Definition
Money value of all transactions between residents of one country and residents of all other countries
Foreign exchange market – where currencies of different countries are exchanged
Imports are debit transaction. Supplies U.S. currency in foreign exchange market. Demand for $ decreased. Negative impact on Trade Balance
Exports are credit transaction. Foreigners must exchange own country’s currency for dollars. Demand for dollars increases. Plus to balance of payments |
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Term
| Imports are debit transaction. Supplies U.S. currency in foreign exchange market |
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Definition
| . Demand for $ decreased. Negative impact on Trade Balance |
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Term
| Exports are credit transaction. Foreigners must exchange own country’s currency for dollars. |
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Definition
| Demand for dollars increases. Plus to balance of payments |
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Term
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Definition
Outflows of U.S. Capital and loans to foreigners (increase demand for foreign currency and supply of U.S. currency on the FX market). Debit. +
Inflows of foreign capital and foreign loans to Americans (increases demand for U.S. $). Credit |
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Term
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Definition
| – reserve balances made up of: foreign currencies, gold, reserves in the IMF, SDR’s |
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Term
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Definition
Countries with deficit in current and capital accounts can access
+ reserve balances = outflow of capital / debit
- reserve balances = inflow / credit |
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Term
Official Reserve Account
SDR’s – |
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Definition
| international money used to settle international accounts |
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Term
| Balance of Payments Summary |
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Definition
Current Account
Capital Account
Official Reserve Balance
Statistical Discrepancy |
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Term
| International Monetary Fund |
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Definition
international organization that oversees international monetary syste
Holds currency reserves for member nations
Makes loans to central banks
m |
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Term
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Definition
Market for exchanging currencies between countries.
Exchange rates = price of a currency in terms of another
Import transaction : supply dollars ; Buy pesos
Dollar price per peso decreases then Americans buy more pesos (imports increase).
Dollar price per peso increases. Americans buy fewer pesos (Imports decrease) |
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Term
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Definition
Supply & Demand for currency determines equilibrium exchange
Factors that determine exchange rates:
Difference in income growth rates
Relative inflation rates
Changes in real interest rates |
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Term
| Factors that determine exchange rates: |
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Definition
Difference in income growth rates
Relative inflation rates
Changes in real interest rates |
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Term
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Definition
Nations’ central banks determine exchange rates
Price below equilibrium. Shortage |
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Term
| What is so bad about overvalued $? |
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Definition
| Makes U.S. exports more expensive/ reduces sales/ impacts trade balance |
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Term
Fixed Exchange Rates
Options under fixed exchange rate: |
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Definition
Devaluation – official price lowered
Revaluation – official price increased.
Deficits/ overvalued currencies can lead to trade restrictions
Monetary policy can be used to support exchange rate |
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Term
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Definition
Automatically fixes exchange rates
Gold standard requires that countries:
Set currency value in terms of gold
Convert currency to gold if requested
Ties money supply to gold holdings
Settle deficits between countries in gold |
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Term
| Case for Fixed Exchange Rates |
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Definition
| Promotes trade due by eliminating exchange rate uncertainties |
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Term
| Case for Flexible Exchange Rates |
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Definition
Takes monetary policy out of exchange rate management
Fixed rates can be widely divergent from equilibrium rates and disrupt trade |
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Term
| Optimal Currency area - European Union (25 countries |
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Definition
Trade and labor mobility – balances economies
Eliminates exchange rate expense/ complications |
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Term
| Current International Monetary System |
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Definition
Managed float – nations now and then intervene to adjust official reserve balances to moderate rate swings
Pluses:
Nations can pursue independent monetary policies
Resolves trade problems w/o restrictions
Countries can pursue independent monetary policies
Flexible
Minuses:
Promotes volatility and uncertainty
Promotes inflation
Takes a long time to adjust |
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Term
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Definition
| nations now and then intervene to adjust official reserve balances to moderate rate swings |
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Term
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Definition
Nations can pursue independent monetary policies
Resolves trade problems w/o restrictions
Countries can pursue independent monetary policies
Flexible |
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Term
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Definition
Promotes volatility and uncertainty
Promotes inflation
Takes a long time to adjust. |
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