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