Open Trade practice questions, Currency Exchange Market notes, Balance of Payments Accounts

Five basic reasons currencies fluctuate

1. Consumer preferences 2. Safe havens to store currency 3. Change in real interest rate in one country relative to the other country 4. Large public-sector borrowing 5. Government manipulation of currency

Which of the following would be a U.S. foreign direct investment?

A U.S. based hotel chain opens a new hotel in Brazil

Which of the following would be U.S. foreign direct investment?

A U.S. citizen opens and operates a law firm in Norway

Which of the following would be foreign direct investment?

A U.S. furniture maker opens a plant in Mexico

A current account surplus must come from

A financial account deficit

A current account deficit must come from

A financial account surplus

A country sells more to foreign countries than it buys from them. It has

A trade surplus and positive net exports

If the United States had negative net exports, it

Bought more abroad than it sold abroad and had trade deficit

Supply increase in one currency =

Demand increase in other currency

Net capital outflow refers to the purchases of

Foreign assets by domestic residents minus the purchase of domestic assets by foreign residents

A country's trade balance

Is greater than zero only if exports are greater than imports

If a country has a trade deficit

It has negative net exports and negative net capital outflow

If a country has a trade surplus

It has positive net exports more and positive net capital outflow

If a country has negative net capital outflows, then it's net exports are

Negative and it's saving is smaller than its domestic investment

Debit

Negative; if an international transaction uses foreign currency to complete the transaction

Credit

Positive; if an international transaction earns foreign currency

Current account

Records a nation's exports and imports of goods and services; includes net investment income and net transfers

Financial account

Records the difference between a country's sale of assets to foreigners and its purchase of assets from foreigners

Suppose that more Chinese decide to vacation in the U.S. and that the Chinese purchase more U.S. Treasury bonds. Ignoring how payments are made for these purchases,

The first action by itself raises U.S. net exports, the second action by itself lowers U.S. net capital outflow

Net capital outflow measures

The imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners

Net investment income

U.S. earnings on investment abroad minus foreigner earnings from capital invested in the United States

Depreciation

Value of currency decreases

Appreciation

Value of currency increases

The current account balance and the financial account balance must sum to

Zero

Net transfers

e.g. Foreign aid sent to other countries and funds that immigrants send to family abroad