Macroeconomics: Ch. 10 Trade Balance

If the Fed raises the interest, the U.S dollar will ________

appreciate

What are four strategies to reduce trade imbalance?

- Increasing the level of savings to reduce the trade deficit - Change level of investments - Increase taxes - Decrease government spending

Current Account Balance

A broad measure of the balance of trade that includes trade in goods and services, as well as international flows of income and foreign aid

Stock Variable

A variable that measures something at a particular point in time, such as the amount of money you have with you right now; a country's debt

Flow variable

A variable that measures something over an interval of time, such as your income per week

Injections of Income

Additions to the circular flow of income that are not derived from current income; G + I + X

Closed Economy

An economy that has no interactions in trade or finance with other countries; Y= C+I+G

Open Economy

An economy that interacts freely with other economies around the world; Y = C + I + G + (X - M) or X-M = Y-C-I-G

Intertemporal Trade

Countries trading production for consumption at different points in time

Risk

Currency appreciation or depreciation will affect the rate of return

Rate of return

Difference between annual interest rate in foreign and the depreciation of foreign currency

Consuming more than producing is having trade surplus.

False

Deficits must be paid by producing less than consuming.

False

Sum of outlaws should never equal sum inflows

False

Twin Deficits

Fiscal Deficit + Savings Deficit = Trade Deficit

Leakage of income

Forms of income that are withdrawn from the circular flow of income; S + T + M

Unilateral Transfers

Payments that government, private charities, or individuals makes in which they send money abroad without receiving any direct good or service

Interest Arbitrage

Relationship between interest rates and the exchange rate in the short run

Trade Deficit

The amount by which the cost of a country's imports exceeds the value of its exports. X < M or (X - M) < 0

Trade Surplus

The amount by which the value of a country's exports exceeds the cost of its imports. X > M or (X -M) > 0

Merchandise trade balance

The balance of trade looking only at goods

Balance of Trade

The gap, if any, between a nation's exports and imports

A country's trade surplus is not really reflecting anything more profound than a mismatch between domestic production and domestic consumption.

True

Depreciation of money causes U.S. exports to increase and U.S. imports to decrease

True

If (S-I) < (G-T) then (X-M) is negative

True

If (S-I) > (G-T) then (X-M) is positive

True

Producing more output than its consuming is having trade surplus.

True

If the Fed raises the interest, exports will ________

decrease

If the Fed raised the interest, imports will ________

increase

Trade deficit is:

the process of importing present consumption and exporting future consumption

If the Fed raised the interest, the trade balance will _______

worsen