AP Macroeconomics comparative advantage, balance of payments, and foreign exchange market concepts.
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- What is absolute advantage?
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The ability to produce more of a good with the same amount of resources than another party.- Why do countries specialize in production?
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To take advantage of comparative advantage, allowing them to trade for goods they cannot produce as efficiently.- What are gains from trade?
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The increases in total output and consumption that result when countries specialize according to comparative advantage.- What is autarky?
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A situation where a country produces and consumes only what it can make itself, with no international trade.- What is the terms of trade?
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The ratio at which one country trades its exports for the imports of another country, or the rate of exchange between two goods in trade.- What is the balance of payments?
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A record of all transactions between a country and the rest of the world, including goods, services, and financial assets.- What does the current account measure?
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The flow of goods, services, income, and transfers between a country and the rest of the world.- What does the capital account measure?
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The transfer of assets and financial claims (capital flows) between a country and other countries.- What is the financial account?
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The account that records investment income and changes in ownership of financial assets between countries.- What must be true about the balance of payments as a whole?
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The sum of the current account and the capital/financial account must equal zero (accounting identity).- What is the foreign exchange market?
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The global market where currencies are traded, determining exchange rates between different countries' currencies.- What is an exchange rate?
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The price of one currency in terms of another currency, or how much of one currency you must give to get another.- What does currency appreciation mean?
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An increase in the value of a currency relative to other currencies, making exports more expensive and imports cheaper.- What does currency depreciation mean?
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A decrease in the value of a currency relative to other currencies, making exports cheaper and imports more expensive.- What is revaluation?
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An increase in the official value of a country's currency under a fixed exchange rate system.
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