Ch 15 Exchange Rates, International Trade, and Capital Flows Flashcards
Nominal exchange rate
the rate at which two currencies can be traded for each other
Appreciation
an increase in the value of a currency relative to other currencies
Depreciation
a decrease in the value of a currency relative to other currencies
Flexible exchange rate
an exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market
Foreign exchange market
the market on which currencies of various nations are traded for one another
Fixed exchange rate
an exchange rate whose value is set by official government policy
Market equilibrium value of the exchange rate
the exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market
Real exchange rate
the price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency
Law of one price
if transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations
Purchasing power parity (PPP)
the theory that nominal exchange rates are determined as necessary for the law of one price to hold
Trade balance (or Net exports)
the value of a country’s exports less the value of its imports in ta particular period (quarter or year)
Trade surplus
when exports exceed imports, the difference between the value of a country’s exports and the value of its imports in a given period
Trade deficit
when imports exceed exports, the difference between the value of a country’s imports and the value of its exports in a given period
International capital flows
purchases or sales of real and financial assets across international borders
Capital inflows
purchases of domestic assets by foreign households and firms
