Comprehensive Guide to AP Macroeconomics Unit 6: International Trade and Finance

Balance of Payments (BoP)

A record of all international trade and financial transactions made by a country's residents with the rest of the world over a specific period.

Current Account (CA)

Records trades in goods and services, investment income, and current transfers, measuring the flow of funds for 'now' transactions.

Balance of Trade

The difference between the value of exports and imports of goods and services.

Trade Deficit

Occurs when imports exceed exports, indicating money is flowing out.

Trade Surplus

Occurs when exports exceed imports, indicating money is flowing in.

Net Investment Income

Income earned on foreign assets minus income paid to foreign investors.

Net Transfer Payments

Money sent without goods or services exchanged, such as foreign aid or remittances.

Financial Account (CFA)

Records the purchase and sale of financial assets and real assets between a country and the rest of the world.

Capital Inflow

Occurs when foreigners buy domestic assets, creating money flow into the country.

Capital Outflow

Occurs when domestic citizens buy foreign assets, creating money flow out of the country.

Current Account Deficit

Occurs when a country buys more goods than it sells, leading to the need to sell assets or borrow.

Current Account Surplus

Occurs when a country sells more goods than it buys, allowing it to accumulate foreign currency.

Exchange Rate

The price of one currency in terms of another currency.

Appreciation

When a currency gains value relative to another currency.

Depreciation

When a currency loses value relative to another currency.

Demand for Currency

The desire of foreigners to buy a country's exports or invest in its financial assets.

Supply of Currency

The need of domestic citizens to sell their own currency to purchase foreign currency.

Tastes and Preferences

A determinant of exchange rates; shifting consumer preference increases foreign currency demand.

Real Interest Rates

The interest rate adjusted for inflation; key factor in attracting foreign capital.

Income Levels

Changes in national income that affect supplied currency levels and imported goods demand.

Price Levels (Inflation)

High domestic inflation decreases the demand for that country's currency due to unattractiveness.

Speculation

Investors buy currencies they expect to appreciate in the future.

Fiscal Policy Impact

Government spending or tax alterations affect exchange rates through the interest rate effect.

Monetary Policy Impact

Changes in money supply impact interest rates and subsequently affect currency values.

Protective Tariff

A tax on imported goods designed to make domestic products more attractive.

Demand for Domestic Currency

Increases when foreign consumers wish to purchase more of a country's goods and services.

Supply of Domestic Currency

Increases when domestic consumers wish to buy more foreign goods and services.

Net Exports (X - M)

The value of a country's total exports minus the value of its total imports.

Aggregate Demand

The total demand for goods and services within a particular market.

Interest Rate Effect

The impact of interest rate changes on currency demand through foreign investment attraction.

Shift in Demand

An increase or decrease in demand changes for currency based on economic factors.

Capital Flows

Movement of money for the purpose of investment, trade, or business production.

Nominal Interest Rates

The stated interest rate on loans or investments that does not account for inflation.

Real Interest Rate Calculation

Nominal interest rate minus the inflation rate.

Price Level Effect on Currency

High domestic price levels generally lead to currency depreciation.

Strong Currency Fallacy

The misconception that a stronger currency is universally beneficial.

Foreign Direct Investment

Investment made by a company or individual in one country in business interests in another country.

Aggregate Demand Shift Left

Occurs when net exports decrease due to currency appreciation.

Aggregate Demand Shift Right

Occurs when net exports increase due to currency depreciation.

Expansionary Fiscal Policy Effect

Increases demand for loanable funds resulting in higher interest rates and currency appreciation.

Expansionary Monetary Policy Effect

Increases money supply that typically leads to lower interest rates and currency depreciation.