Balance of payments, exchange rates, net capital outflow, and effects of policy in an open economy.
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- What is the balance of payments?
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The sum of all transactions between a country and the rest of the world, including the current account, financial account, and capital account.- What does the current account measure?
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The value of a country's imports and exports of goods and services, plus income earned abroad minus income paid to foreigners.- What is the financial account?
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The account that records transactions involving the buying and selling of assets between countries.- What is the capital account?
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The account in the balance of payments that records transfers of capital and the acquisition or disposal of non-financial assets.- In the balance of payments identity, net capital outflow equals ____.
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net exports- What is the exchange rate?
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The price of one currency in terms of another currency.- What is a nominal exchange rate?
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The rate at which one currency can be exchanged for another, measured in units of foreign currency per unit of domestic currency.- What is the real exchange rate?
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The rate at which goods and services from one country can be exchanged for goods and services from another, adjusted for price levels.- What happens to exports when a country's currency appreciates?
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Exports become more expensive for foreign buyers, so the quantity of exports tends to decrease.- What happens to imports when a country's currency depreciates?
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Imports become more expensive for domestic consumers, so the quantity of imports tends to decrease.- What is the foreign exchange market?
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The market where currencies are traded, determined by the supply and demand for different currencies.- What is purchasing power parity (PPP)?
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The principle that in the long run, the exchange rate between two countries should equal the ratio of their price levels.- What is interest rate parity?
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The principle that interest rates and exchange rates adjust so that the expected return from investing in different currencies is equal.- What is net capital outflow?
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The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.- What does net exports equal in the balance of payments?
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The value of a country's exports minus its imports of goods and services.
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