Foreign Exchange Market Flashcards
Define International trade
The exchange of goods or services across international borders
What are the 2 main reasons for international trade
Supply reasons
Demand reasons
Why do countries demand goods via international trade
They have a demand for a good that they cannot satisfy themselves
What are the 5 influences of total demand for goods and services
Size of the population
Income levels
Change in the wealth of the population
Preferences and tastes
The difference in consumption patterns
What are the 6 supply reasons for international trade
Natural resources
Climatic conditions
Labour resources
Technological resources
Specialisation
Capital
What are the 4 effects of international trade
Specialisation
Mass production
Efficiency
Globalisation
What is the balance of payments
A comprehensive and systematic record of all transactions between one country and all other countries of the world for a specific period of time
What are the 4 accounts in balance of payments
Current
Capital transfer
Financial
Unrecorded transactions
What is the current account
International daily transactions in terms of production, income and expenditure
What is the capital transfer account
International transactions in terms of ownership of fixed assets
What is the financial account
International investment transactions by South Africans in other countries and by foreigners in South Africa
What is unrecorded transactions
Provide for any omissions
What are the 7 corrections of balance of payments
Interest rates
Import controls
Borrowing and lending
Change in demand
Export promotion
Import substitution
Change in exchange rates
Describe interest rates as a correction of balance of payments
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
Describe import controls as a correction of BoP
Import tariffs and other duties and quotas
Describe borrowing and lending as a correction of BoP
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
Describe change in demand as a correction of BoP
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
What are the 3 systems for change in exchange rates
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
Define exchange rates
It is the price of one country’s currency expressed in terms of another country’s currency
What is devaluation
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
What is revaluation
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
Look at supply and demand of foreign exchange pg 54
Describe exchange rate fluctuation (4)
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
Look at graphs on of 56 and 57
