Class 3 (ch. 2 + 3) Flashcards
What is the main objective of the world bank?
Providing loans to other nations that need capital, such as helping countries develop airports, shipping and more to reduce poverty and promote economic growth
What is the International Monetary Fund (IMF)?
Institution designed to promote global monetary cooperation, facilitate international trade, and provide financial assistance to countries facing balance of payments problems
What is productivity of a country
It is their value as a country. The higher the countries productivity, the more you are able to produce, the higher your value
What are the two ways a currency is established?
1) Hard peg
2) Soft peg
What is a hard peg?
It is a currency that is determined by another countries currency. Some countries peg themselves to other currencies who they often trade with and so on at a fixed exchange rate.
Another example of hard peg is some countries using another countries currency (ex: Ecuador using USD)
What is a soft peg?
Where a company pegs themselves to another country but allows for fluctuation within a certain range
Who tends to determine the value of a currency?
The government with the amount of money they print, buying bonds, etc
Does most of the world have a pegged or a free floating currency
1/3 of the world has a free floating currency (they’re own currency). Over 40% of countries have soft pegs
Name some pros of having your own currency
-can print money if needed
*-easier to invest (not relying on the middle man which is usually the currency that you are pegged to)
Name some cons of having your own currency
If we think of the Euro, which is the same currency for multiple countries:
-if one country underperforms, it has an impact on all of the currency
-the ability to cure a bad performance depends of the same currency to fix it (ex: when Greece went bankrupt, they affected the value of the euro all together then they also needed more money (euro) in order to get back up and running which is a sort of “double trouble”)
What is Balance of Payment (BOP)?
it is the inflow and outflow of currency
In BOP, what is a credit?
It represents foreign exchange earned (inflow)
In BOP, what is a debbit?
It represents foreign exchange spent (outflow)
What is BOP made up of? (5)
-Current account
-Capital account
-Financial account
-Official reserves account
-Net errors and omissions account
What are the 3 subsections of current account
1) trade balance
2) income
3) capital account
What is trade account under current account
The difference between exports and imports of goods and services. A trade surplus occurs when exports are bigger than imports, while deficit in trade is the opposite
What is income under current account
Includes earnings from investments (like dividends and interest) and compensations of employees working abroad
What is current transfers under current account
Transfers of money for which no goods or services are exchanged such as remittances from citizens living abroad or foreign aid
What is the capital account
Records all transactions involving purchase and sale of assets which can be foreign investments, portfolio investments and other investments
What are the 3 subsections of the financial account under BOP
1) direct investments
2) portfolio investments
3) other investments
What are direct investments under financial account
Investments made to acquire a lasting interest in an enterprise (ex: building) that has a 10% threshold
What are portfolio investments under the financial account of BOP
Investments in financial assets, like stocks and bonds below the 10% threshold
What is included under other investments in the financial account of BOP
Includes loans and deposits
What is official reserves? (name gives it away)
It is the reserve of cash held by a country. Usually the holdings refer to currencies that are dealt in international trade such as the US dollar, Euro, Japanese Yen, gold, etc
What is net errors and omissions account
Accounts for the discrepancies between the recorded inflows and outflows, ensuring the BOP balances out
What are fixed exchange rates under gold standard?
Currencies that are pegged to a certain amount of gold
What is convertibility in terms of exchange currencies under gold standard?
It is where individuals and businesses can exchange their currency for gold at the established rate, providing a guarantee of the currency’s value
What is limited money supply in terms of exchange currencies under gold standard?
The money supply is limited to the amount of gold a country has on hand which restricts the ability of printing money, to control inflation
What are 3 pros of the gold standard?
1) Stability
2) trust
3) discipline
What are 3 cons of the gold standard?
1) inflexibility
2) deflationary pressures
3) resource contraints
What is the “impossible trinitiy”
it is a concept that states that international economies CAN’T achieve all of the following three things:
1) stable exchange rate
2) free capital mobility
3) independent monetary policy
