U3 How the International Economy Works

Question 1

Balance of Trade (BOT)

Answer 1

the difference between a country’s imports and its exports

Question 2

Trade Surplus

Answer 2

• an economic measure of a positive balance of trade, where a country’s exports exceeds its imports
• A trade surplus represents a net inflow of domestic currency from foreign markets

Question 3

Inflation

Answer 3

• Inflation is the rise in prices and decline in currency value.
• Central banks control inflation using interest rates which prevents further price increases.

Question 4

Hyperinflation

Answer 4

a situation where the price increases are so out of control that the concept of inflation is meaningless

Question 5

Purchasing Power Parity (PPP)

Answer 5

• indicating equal buying power.
• The same standard of living costs different amounts of money in different places in the world
• Economists define what is called a ‘basket of goods’ that are available everywhere that markets exist

Question 6

What is in the ‘basket’ of PPP

Answer 6

The basket of goods and services priced for the PPP exercise is a sample of all goods and services covered by GDP

Question 7

Gross Domestic Product (GDP)

Answer 7

• an economic measure intended to represent the sum of all economic activity in a country
• Economic activity is measured according to market value
• the sum of all market value delivered in a country

Question 8

GDP formula

Answer 8

GDP = (C) consumers + (I) equal investments by business + (G) government spending + (export - import)

Question 9

National Currency

Answer 9

• The currency or legal tender issued by a nation’s central bank or monetary authority
• The national currency of a nation is usually the predominant currency used for most financial transactions in that country

Question 10

International currency exchange rate

Answer 10

• represent the value of one currency compared to another.
• Rates can be floating, changing constantly due to multiple factors.
• can also be pegged to another currency, moving alongside it.

Question 11

factors influence currency exchange rates

Answer 11

• the market forces of supply and demand
• Some countries may decide to use a pegged exchange rate that is set and maintained artificially by the government

Question 12

high interest rates

Answer 12

• make borrowing money expensive and reduce money supply.
• This lowers the cost of goods/services or prevents further price increases.