Subjects

AP Macroeconomics

Open Economy: International Trade and Finance

Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

Understanding Balance of Trade and Balance of Payments

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Understanding Balance of Trade and Balance of Payments

Diya Shriyan

@diyashriyan_xxtq

78 Followers

The balance of trade and balance of payments are crucial economic indicators that measure international transactions, with key differences in their scope and components. The balance of payments provides a comprehensive view of all international economic activities, while the balance of trade focuses specifically on goods and services exchanges.

A comprehensive system tracking all international economic transactions including the current account, financial account, and capital flows
Trade deficits occur when imports exceed exports, as seen in U.S.-China trade relations
Exchange rates play a vital role in international trade, affecting the relative value of currencies
The current account balance encompasses trade in goods and services, investment income, and transfers
The financial account tracks international investment flows and asset purchases

7/3/2023

<h2 id="balanceoftradevsbalanceofpayments">Balance of Trade vs Balance of Payments</h2>
<h3 id="includesonlygoodsandservices">Includes only

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Exchange Rates and International Trade

The second page explores the relationship between exchange rates and international trade. Exchange rates represent the relative value of currencies and significantly impact international transactions.

Definition: An exchange rate is the price of one currency relative to another currency.

Example: If the U.S. dollar depreciates against the euro, more dollars are needed to buy one euro.

Highlight: Currency appreciation and depreciation refer to changes in exchange rates, not the current rate itself.

Vocabulary: Appreciation occurs when a currency's value increases relative to other currencies.

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FOREX Market Dynamics

The third page delves into foreign exchange (FOREX) market mechanics and factors affecting currency values.

Definition: FOREX supply and demand are interconnected - demanding one currency necessarily means supplying another.

Example: When British tourists visit the U.S., demand for U.S. dollars increases while the supply of British pounds rises.

Highlight: Changes in tastes, relative incomes, price levels, and interest rates all affect currency exchange rates.

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Currency Value Fluctuations

The fourth page examines specific scenarios affecting currency values, particularly focusing on the Mexican peso and U.S. dollar.

Example: High inflation in Mexico would decrease demand for pesos as trading partners avoid higher-priced Mexican products.

Highlight: Interest rate changes significantly impact currency values through their effect on international capital flows.

Definition: Capital flows respond to interest rate differentials, with money moving toward countries offering higher returns.

The relationship between interest rates and currency appreciation demonstrates the complex interconnections in international finance.

View

Exchange Rate Impacts

The fifth page continues the discussion of exchange rate dynamics and their effects on international trade.

Highlight: Changes in real interest rates affect capital flows and currency values.

Example: Higher U.S. interest rates attract foreign capital, leading to dollar appreciation.

Definition: Currency depreciation occurs when a currency's value decreases relative to other currencies.

The material emphasizes how various economic factors influence exchange rates and international trade flows.

View

Balance of Trade vs Balance of Payments Fundamentals

The first page introduces fundamental concepts of international trade accounting. The balance of trade focuses exclusively on goods and services transactions, while the balance of payments encompasses all international transactions.

Definition: The balance of payments is a comprehensive summary of a country's international transactions within a given year, prepared in domestic currency.

Example: A trade deficit exists in U.S.-China relations because the U.S. imports significantly more than it exports to China.

Highlight: The current account consists of three main components: trade in goods and services, investment income, and net transfers.

Vocabulary: Foreign Direct Investment (FDI) refers to when a foreign company purchases or establishes business operations in a different country.

The financial account measures international financial asset transactions and includes concepts like net capital outflow and Foreign Direct Investment.

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Knowunity is the # 1 ranked education app in five European countries

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Subjects

AP Macroeconomics

Open Economy: International Trade and Finance

Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

Understanding Balance of Trade and Balance of Payments

Diya Shriyan

@diyashriyan_xxtq

78 Followers

A comprehensive system tracking all international economic transactions including the current account, financial account, and capital flows
Trade deficits occur when imports exceed exports, as seen in U.S.-China trade relations
Exchange rates play a vital role in international trade, affecting the relative value of currencies
The current account balance encompasses trade in goods and services, investment income, and transfers
The financial account tracks international investment flows and asset purchases

7/3/2023

10th/11th

AP Macroeconomics

Exchange Rates and International Trade

Definition: An exchange rate is the price of one currency relative to another currency.

Example: If the U.S. dollar depreciates against the euro, more dollars are needed to buy one euro.

Highlight: Currency appreciation and depreciation refer to changes in exchange rates, not the current rate itself.

Vocabulary: Appreciation occurs when a currency's value increases relative to other currencies.

FOREX Market Dynamics

The third page delves into foreign exchange (FOREX) market mechanics and factors affecting currency values.

Definition: FOREX supply and demand are interconnected - demanding one currency necessarily means supplying another.

Example: When British tourists visit the U.S., demand for U.S. dollars increases while the supply of British pounds rises.

Highlight: Changes in tastes, relative incomes, price levels, and interest rates all affect currency exchange rates.

Currency Value Fluctuations

The fourth page examines specific scenarios affecting currency values, particularly focusing on the Mexican peso and U.S. dollar.

Example: High inflation in Mexico would decrease demand for pesos as trading partners avoid higher-priced Mexican products.

Highlight: Interest rate changes significantly impact currency values through their effect on international capital flows.

Definition: Capital flows respond to interest rate differentials, with money moving toward countries offering higher returns.

The relationship between interest rates and currency appreciation demonstrates the complex interconnections in international finance.

Exchange Rate Impacts

The fifth page continues the discussion of exchange rate dynamics and their effects on international trade.

Highlight: Changes in real interest rates affect capital flows and currency values.

Example: Higher U.S. interest rates attract foreign capital, leading to dollar appreciation.

Definition: Currency depreciation occurs when a currency's value decreases relative to other currencies.

The material emphasizes how various economic factors influence exchange rates and international trade flows.

Balance of Trade vs Balance of Payments Fundamentals

Definition: The balance of payments is a comprehensive summary of a country's international transactions within a given year, prepared in domestic currency.

Example: A trade deficit exists in U.S.-China relations because the U.S. imports significantly more than it exports to China.

Highlight: The current account consists of three main components: trade in goods and services, investment income, and net transfers.

Vocabulary: Foreign Direct Investment (FDI) refers to when a foreign company purchases or establishes business operations in a different country.

The financial account measures international financial asset transactions and includes concepts like net capital outflow and Foreign Direct Investment.

Can't find what you're looking for? Explore other subjects.

Knowunity is the # 1 ranked education app in five European countries

Knowunity was a featured story by Apple and has consistently topped the app store charts within the education category in Germany, Italy, Poland, Switzerland and United Kingdom. Join Knowunity today and help millions of students around the world.

Download in

Google Play

Download in

App Store

4.9+

Average App Rating

15 M

Students use Knowunity

#1

In Education App Charts in 12 Countries

950 K+

Students uploaded study notes

Still not sure? Look at what your fellow peers are saying...

iOS User

I love this app so much [...] I recommend Knowunity to everyone!!! I went from a C to an A with it :D

Stefan S, iOS User

The application is very simple and well designed. So far I have found what I was looking for :D

SuSSan, iOS User