4-6 definitions.docx - Chapter 4 Balance of Payments(BOP...

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Chapter 4Balance of Payments (BOP)– a statement of account that shows all transactions between the residents of one country and the rest of the world for a given period of timeCurrent Account– the activities of consumers and businesses in the economy with respect to the trade balance, services balance, income balance, and net transfersTradeBalance– the net of merchandise exports and merchandise importsTradeDeficit– when merchandise imports exceed merchandise exports for a countryServiceBalance– the net of exports of services and imports of servicesIncomeBalance- the net of investment income from abroad and investment payments to foreignersBalance ofTransfers– the net of transfer payments going overseas and inflows from abroadFinancial Account– consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivativesRisk Premium– the added return required by investors for risk associated with a security or assetForeign Direct Investment (FDI)– encompasses purchases of fixed assets (such as factories and equipment) abroad used in the manufacture and sales of goods and servicesStatisticalDiscrepancy– reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zeroForeign Exchange Markets– a global network of international banks and currency traders that trade differentcountries’currenciesExchange Rate– the price at which one currency can be converted to another currencyIndependent Floating Exchange Rate System– system that sets the values of major currencies based on their demand and supply in world currency marketsManaged Floating Exchange Rate System– system that determines the value of some currencies partly by demand and supply in the foreign exchange market and partly by active government intervention in the foreign exchange marketFixed Exchange Rate System– system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rateSpot Market– exchange that trade currencies on a real-time basis for immediate deliveryBid-ask Spread– the difference between bid and ask prices of a currency; the transaction fee earned by the bankDirect Quotes– prices of a foreign currency in dollars or the number of dollars per one unit of foreign currency
IndirectQuotes– the reciprocal of the direct quote or the prices of a dollar (for example) in foreign currency termsForwardMarket– exchange that enables purchases and sales of currencies in the future with prices (or the forward rate) established at a previous timeForward Rate– the price at an earlier time of a currency in terms of another currency established for future delivery in the forward marketDiscount

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