Chapter 19 - international finance Flashcards
balance of payments accounts
a nations records its international trading, borrowing and lending
Three balances in BPA
1) current account - records receipts from the sale of goods and services to other countries minus payments for goods plus the net amount of interest and transfers
2) capital account - records foreign investment in the united states minus US investments
3) Official settlement account - change in US official reserves.
US official reserve
the governments holdings of foreign currency
Net borrower
a country that is borrowing more from the rest of the world than it is lending the rest of the world
net lender
a country that is lending more to the rest of the world than it is borrowing from it
Debtor nation
a country that during its entire history has borrowed more from the rest of the world than it has lent the rest of the world
Creditor nation
a country that during its entire history has invested more in the rest of the world than other countries have invested in it
Current account balance
= NX + net interest an transfers from abroad
private sector balance
saving minus investments, if savings exceeds investment, a private sector surplus is lent to other sectors
government sector balance
net taxes minus government expenditure on goods and services.
Demand in the foreign exchange market
the quantity demanded depends on three main reasons:
1) Exchange rate
2) interest rates in the US and other countries
3) expected future interest rate
Why does the exchange rate influence the quantity of dollars demanded?
1) exports effect
2) expected profit effect
Exports effect
the larger the value of US exports, the larger is the quantity of dollars demanded.
Expected profit effect
the larger the expected profit, the greater is the quantity of dollars demanded in the foreign exchange market
US interest rate differential
US interest rate minus the foreign interest rate
the law of supply of foreign exchange
traders supply US dollars in the foreign exchange market when people and businesses buy other currencies
Why does the rate rate influence on the demand side of the market
1) import effect - the larger the value of US imports, the larger is the quantity of foreign currency demanded to pay for these imports
2) expected profit effect - the larger the expected profit from holding a foreign currency, the greater is the quantity of that currency demanded and the greater is the quantity of dollars supplied in the foreign exchange market
Changes in the supply of dollars
1) interest rate in the US and other countries - larger US interest rates, smaller the demand
2) expected future exchange rate - higher expected future exchange rate, the smaller the supply of dollars
purchasing power parity
equal value of money, a situation in which money buys the same amount of goods and services in different currencies
Interest rate parity
equal interest rates - a situation in which the interest rate in one currency equals the interest rte in another currency when exchange rate changes are take into account
