Chapter 18

Trade Deficit

If the balance of trade is negative, then there is a...

Trade Surplus

If the balance of trade is positive, then there is a...

appreciate

If the increase in demand is larger than the increase in supply of $US, the exchange rate will (appreciate/depreciate)

statistical discrepancy

the value of mismeasurement in the balance of payments

Weak Dollar

the value of the dollar is less than that of other countries, foreign goods are more expensive, imports into the US are low, exports out of the US are high

Strong Dollar

the value of the dollar is more than that of other countries, foreign goods are less expensive, helps businesses that import materials and consumers, but hurts exports

deficits, surpluses

Because of persistent current account (surpluses/deficits), the United States also holds persistent financial account (surpluses/deficits)

appreciation

A (appreciation/depreciation) of the $US causes U.S. exports to fall and imports to rise, hence aggregate demand will fall as well as GDP

depreciation

A (appreciation/depreciation) of the $US causes U.S. exports to rise and imports to fall, hence aggregate demand will rise as well as GDP

Currency Depreciation

A decrease in the market value of one currency relative to another currency

Open Economy

An economy that has interactions in trade or finance with other countries

Closed Economy

An economy that has no interactions in trade or finance with other countries

Saving and investment equation

An equation that shows that national saving is equal to domestic investment plus net foreign investment

Currency Appreciation

An increase in the market value of one currency relative to another currency

trade, investment

Countries are linked economically by: 1) _____ in goods and services 2) flows of financial __________

negative financial account balance

Current Account Balance = (positive financial account balance/negative financial account balance)

Net Exports

Equal to the current account balance/ net foreign investment

Daily

Exchange rates between countries fluctuate (daily/weekly/monthly/yearly)

open

Expansionary fiscal policy will be less effective in an (open/closed) economy

open

Monetary policy is more effective in an (open/closed) economy

0

Number that the balance of payments between two countries must always equal

Demand

The ______ for $US comes from: 1. Foreign firms and households wanting to buy U.S. goods and services. 2. Foreign firms and households wanting to invest in U.S. physical or financial assets. 3.Currency traders believing the value of the $US will rise.

Supply

The ______ for $US comes from: 1. U.S firms and households wanting to buy foreign goods and services 2. U.S. firms and households wanting to invest in foreign physical or financial assets 3. Currency traders believe the value of the foreign currency will rise

Net foreign investment

The difference between capital outflows from a country and capital inflows, also equal to net foreign direct investment plus net foreign portfolio investment

Balance of Trade

The difference between the value of the goods a country exports and the value of the goods a country imports

Current Account

The part of the balance of payments that records a country's net exports, net income on investments, and net transfers

Financial Account

The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country

Capital Account

The part of the balance of payments that records relatively minor transactions such as migrants' transfers and sales and purchases of nonproduced, nonfinancial assets

Real Exchange Rate

The price of domestic goods in terms of foreign goods

Balance of Payments

The record of a country's trade with other countries in goods, services, and assets

Nominal Exchange Rate

The value of one country's currency in terms of another country's currency

Foreign Direct Investment

When firms build or buy facilities in foreign countries

twin deficits

When government budget deficits lead to declines in net exports

Foreign Portfolio Investment

When investors buy stock or bonds issued in another country

Spublic, decline

When the government runs a budget deficit, _______ is negative, and national savings tends to (increase/decline)

discourage, fall

When the government runs a budget deficit, it finances its dissaving by selling bonds. To attract buyers, the government must typically raise interest rates. •Higher interest rates (encourage/discourage) firms from making investments. •They encourage funds to flow to the U.S. to buy those bonds, causing the $US to appreciate, but this causes net exports to (rise/fall). And net exports equal net foreign investment.

capital inflow

purchases of American assets by foreigners

Capital outflow

purchases of assets overseas by Americans