Foreign Exchange Market

Question 1

Define International trade

Answer 1

The exchange of goods or services across international borders

Question 2

What are the 2 main reasons for international trade

Answer 2

Supply reasons
Demand reasons

Question 3

Why do countries demand goods via international trade

Answer 3

They have a demand for a good that they cannot satisfy themselves

Question 4

What are the 5 influences of total demand for goods and services

Answer 4

Size of the population
Income levels
Change in the wealth of the population
Preferences and tastes
The difference in consumption patterns

Question 5

What are the 6 supply reasons for international trade

Answer 5

Natural resources
Climatic conditions
Labour resources
Technological resources
Specialisation
Capital

Question 6

What are the 4 effects of international trade

Answer 6

Specialisation
Mass production
Efficiency
Globalisation

Question 7

What is the balance of payments

Answer 7

A comprehensive and systematic record of all transactions between one country and all other countries of the world for a specific period of time

Question 8

What are the 4 accounts in balance of payments

Answer 8

Current
Capital transfer
Financial
Unrecorded transactions

Question 9

What is the current account

Answer 9

International daily transactions in terms of production, income and expenditure

Question 10

What is the capital transfer account

Answer 10

International transactions in terms of ownership of fixed assets

Question 11

What is the financial account

Answer 11

International investment transactions by South Africans in other countries and by foreigners in South Africa

Question 12

What is unrecorded transactions

Answer 12

Provide for any omissions

Question 13

What are the 7 corrections of balance of payments

Answer 13

Interest rates
Import controls
Borrowing and lending
Change in demand
Export promotion
Import substitution
Change in exchange rates

Question 14

Describe interest rates as a correction of balance of payments

Answer 14

Domestic demand can be changed by changing interest rates
If interest rates increase - spending decreases
Foreigners increase investment in the country with higher interest rates
Most widely used instrument

Question 15

Describe import controls as a correction of BoP

Answer 15

Import tariffs and other duties and quotas

Question 16

Describe borrowing and lending as a correction of BoP

Answer 16

Countries with surpluses lend money to countries with deficits
Countries with deficits often borrow, as a result, developing countries have large amounts of foreign debt
Countries may borrow from the IMF
Borrowing is not a long-term solution for disequilibrium

Question 17

Describe change in demand as a correction of BoP

Answer 17

An increase in domestic demand causes an increase in imports and this has a negative effect on the balance of BoP
A decrease has the opposite effect

Question 18

What are the 3 systems for change in exchange rates

Answer 18

Free-floating exchange rates - They change automatically
Managed floating exchange rate - Central banks use their reserves to effect depreciation and appreciations.
Fixed exchange rates - Currencies are devalued and revalued

Question 19

Define exchange rates

Answer 19

It is the price of one country’s currency expressed in terms of another country’s currency

Question 20

What is devaluation

Answer 20

When foreign reserves become low, they devalue the currency
It is a deliberate action taken by the central bank to lower a fixed exchange rate

Question 21

What is revaluation

Answer 21

When foreign reserves become too high, they re-valuate the currency
It is a deliberate action taken by the central bank to increase a fixed exchange rate

Question 22

Look at supply and demand of foreign exchange pg 54

Question 23

Describe exchange rate fluctuation (4)

Answer 23

A floating exchange rate is subject to continuous fluctuations
The value of the currency is determined purely by the forces of the market - supply and demand
The rate of exchange can change if there is a change in the demand or supply of foreign exchange
The central bank has little control over it

Question 24

Look at graphs on of 56 and 57

Question 25

How is an overvalued currency represented in the BoP

Answer 25

Continuous deficits in the current account

Question 26

How is an undervalued currency represented in the BoP

Answer 26

Continuous surpluses in the current account

Question 27

What are the 2 methods of intervention

Answer 27

Direct and indirect

Question 28

What is direct intervention

Answer 28

The central bank buys foreign exchange when the currency is overvalued and sells when it is undervalued

Question 29

What is indirect intervention

Answer 29

Interest rate changes
When a currency is overvalued, they increase interest rates - this invites an inflow of investment, this decreases the deficit on the current account
When a currency is undervalued, they decrease interest rates - this causes an outflow of foreign currency and decreases the surplus on the current account

Question 30

Define terms of trade

Answer 30

Terms of trade compare country’s export prices with its import prices by means of indexes

Question 31

Looks at terms of trade formula of 58

Question 32

What can result in an improvement of terms of trade (4)

Answer 32

An improvement in welfare
Fewer exports needing to be produced to buy the same number of imports
An increase in export prices
A decrease in import prices

Question 33

What can result in a deterioration of terms of trade

Answer 33

A decrease indicates that the country is poorer
Greater volumes of exports need to be produced to afford the same value of imports
A decrease in export prices
An increase in import prices