Understanding Balance of Trade and Balance of Payments

Open

Diya Shriyan

7/3/2023

AP Macroeconomics

Unit 5 AP Macro Notes

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

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

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.

View

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.

View

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.

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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

AP Macroeconomics

•

Jul 3, 2023

•

5 pages

Understanding Balance of Trade and Balance of Payments

Diya Shriyan

@diyashriyan_xxtq

The balance of trade and balance of paymentsare 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... Show more

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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.

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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.

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Join milions of students

By signing up you accept Terms of Service and Privacy Policy

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.

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Improve your grades

Join milions of students

By signing up you accept Terms of Service and Privacy Policy

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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Thomas R

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Brad T

Android user

Not only did it help me find the answer but it also showed me alternative ways to solve it. I was horrible in math and science but now I have an a in both subjects. Thanks for the help🤍🤍

David K

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Sudenaz Ocak

Android user

In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.

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