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