Chapter 39- The Balance of Payments, Exchange Rates, and Trade Deficits
Disadvantages of flexible exchange rates
-Uncertainty and diminished trade -Terms-of-trade changes -Instability
Fixed exchange rate system
A currency system in which governments try to keep the values of their currencies constant against one another
Flexible exchange rate system (Floating exchange rate system)
A currency system that allows the exchange rate to be determined by supply and demand. Prevents balance of payments surpluses and deficits.
Purchasing power parity theory
A theory of international exchange holding that exchange rates are set so that the price of similar goods in different countries is the same.
Net investment income
Amount US citizens earned as interest and dividends from abroad minus how much was paid to foreigners in interest and dividends
Trade deficit
An excess of imports over exports
Managed floating exchange rates
An exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies.
US Trade deficit
Caused by rapid economic growth, trade imbalances with China
Determinants of exchange rates
Consumer tastes, relative incomes, relative inflation, and speculation all can shift the exchange rates of currencies. Increase in demand for USD causes appreciation of dollar Increase in supply for USD causes depreciation of dollar Appreciation of USD causes depriciation of other currencies
Official reserves
Foreign currencies owned by the central bank of a nation. These reserves must be kept in check in order to maintain a balance of payments.
Exchange control
Foreign exchange must be sold to a control agency to be rationed. Heavily scrutinized for distorted trade, favoritism, restricted choice, and the use of black markets.
Relative inflation rate changes
Higher inflation = Depreciation of dollar
Relative income changes
Higher national income = Depreciation of dollar due to higher demand for foreign currency
Current account
In the balance of payments, records transactions involving the export or import of goods and services
Relative interest rates
Increase in U.S. rates leads to increase in demand for U.S. deposits and a decrease in demand for foreign deposits, leading to a increase in demand for dollars and an increased exchange rate for the dollar.
Currency speculation
Involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.
Currency interventions
Manipulations of the market to maintain a fixed exchange rate Official reserve use- A government's buying and selling of its own currency or foreign currencies to alter international exchange rates Trade policies- Trade controls to shift supply and demand Exchange controls Fiscal policy/Monetary policy- Increase national income, increase money supply, etc.
Balance of payments surplus
Overage that occurs when more money flows into a nation than out of that nation. Resolved by buying official reserves for USD on the international exchange market, "exporting dollars".
Balance of payments deficit
Shortfall that occurs when more money flows out of a nation than into that nation. Resolved by selling official reserves for USD on the international exchange market, "importing dollars"
Balance of payments
The difference between the flow of money into and out of a country.
Balance on goods and services
The exports of goods and services of a nation less its imports of goods and services in a year
Capital and financial account
The section of a nation's international balance of payments that records (1) debt forgiveness by and to foreigners and (2) foreign purchases of assets in the United States and U.S. purchases of assets abroad.
Trade surplus
When a country exports more than it imports
International asset transactions
involve the transfer of the property rights to either real or financial assets between the citizens of one country and the citizens of another country
