Unit 6: International Trade and Foreign Exchange
1. (____/15) Define the term and explain a situation that demonstrates the ‘real world’ application of
each of the following. Make sure your example clearly demonstrates
...
Unit 6: International Trade and Foreign Exchange
1. (____/15) Define the term and explain a situation that demonstrates the ‘real world’ application of
each of the following. Make sure your example clearly demonstrates your understanding of each
concept.
a. Trade Deficit and Trade Surplus (___/5)
Balance of Trade: Goods and Services. (only)
Ex: Net Exports= Exports – Imports
Balance of Payments: International movement of money.
Ex: Credit-In Debit – Out
Trade Deficit: Exporting less than is imported. This creates and is known as a trade gap in terms of
Balance of Trade of goods and services.
Ex: In 2014, the U.S was Exporting 10% Automotive vehicles, parts, and engines and importing 14% of
Automotive vehicles and engines. So, they are exporting less than they are importing. Creating a Trade
Deficit(Negative).
Trade Surplus: Exporting more goods and services than the goods and services being imported.
Ex: In 2014, the U.S was exporting 34% capital goods and except automotive and importing 25% of
capital goods and except automotive. So, they were exporting more capital goods and except
automotive than they were importing. Creating a Trade Surplus(Positive).
b. Current Account and Financial Account ( ____/5)
Current Account: Is made up of 3 parts. Factors influencing Current Account defiit/surplus are
consumer import spending, capital flows from abroad, exchange rate, relative inflation rates,
competitiveness/productivity, saving rates.
1. Net Exports: Trades in goods and services (Net Exports): Difference between a nation’s
exports of goods and services and its imports of goods and services and its imports of goods and
services (Balance of Trade) in money.
Ex: toys imported from China(Negative-Debit)
U.S. cars exported to Mexico(Positive-Credit)
2. Investment Income: Income from the factors of Production including payments made to foreign
investors on interest bearing accounts.
Ex: Money earned by Japanese car producers in the U.S
3. Net Transfers: Money flows from the private or public sectors.
Ex: Donations, aids and grants, official assistance, and remittance (Money sent home to family)
Financial (Capital): Measures the purchase and sale of financial assets abroad
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