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Lecture 20

ECON-1007EL Lecture Notes - Lecture 20: Devaluation, Foreign Exchange Controls, Foreign Exchange Market

Economics / Science Èconomique
Course Code
Daviau Charles

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Chapter 19: Open-Economy Macroeconomics NOT ON EXAM
Balance of payments accounts A summary of the country’s transactions with
other countries
Balance of payments on current account or
current account
Its balance of payments on goods and
services plus net international transfer
payments and factor income
Balance of payments on goods and services The difference between its exports and its
imports during a given period
Merchandise trade balance The difference between a country’s exports
and imports of goods
Balance of payments on financial account or
financial account
The difference between its sales of assets to
foreigners and its purchases of assets from
foreigners during a given period
GDP – Gross domestic product The value of goods and services produced in
a country, doesn’t include two sources of
income that are included in calculating the
current account balance: international factor
income and international transfers.
GNP Adds in items such as the earnings of
Canadian companies abroad and subtracts
items such as the interest payments on
bonds owned by residents of China and Japan
Foreign exchange market Currencies are traded in the foreign
exchange market
Exchange rates The prices at which currencies trade
Appreciates When a currency becomes more valuable in
terms of other currencies, it appreciates
Depreciates When a currency becomes less valuable in
terms of other currencies, it depreciates
Equilibrium exchange rate The exchange rate at which the quantity of a
currency demanded in the foreign exchange
market is equal to the quantity supplied
Real exchange rates Exchange rates adjusted for international
differences in aggregate price levels
Purchasing power parity (between two
The nominal exchange rate at which a given
basket of goods and services would cost the
same amount in each country
Exchange rate regime A rule governing policy toward the exchange
Fixed exchange rate When the government keeps the exchange
rate against some other currency at or near a
particular target
Floating exchange rate When the government lets market forces
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