| balance of payments | Measures the net flow of currency into the country from
abroad.
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| balance-of-payments surplus | Occurs when more money is entering the country than
is leaving it.
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| beggar-thy-neighbor policy | Attempt to increase domestic output at the expense of
the output of other countries.
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| capital account | Net flow of dollars into the country resulting from the acquisition of domestic assets by foreigners.
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| clean floating | Flexible exchange rate system in which the central bank does not intervene in foreign exchange markets. Contrast dirty floating.
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| competitive depreciation | Occurs when one country allows its currency to depreciate
in order to improve its trade balance, hurting another country; a series of retaliatory depreciations.
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| currency appreciation | See appreciation and depreciation.
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| currency depreciation | See appreciation and depreciation.
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| current account | Net flow of dollars into the country resulting from the sale of
domestic goods and services, and from net transfers from abroad.
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| devaluation | Decrease in the value of the domestic currency relative to the currencies of other countries; used when exchange rates are fixed.
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| Economic and Monetary Union (EMU) | The European countries that have signed
the Maastricht Treaty and adopted a common currency, the euro. Box 12-1 in the textbook reviews the status of this union.
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| euro | The common currency of the European Monetary Union.
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| external balance | Occurs when the balance of payments is neither in surplus nor in deficit; when the current account and the capital account exactly offset each other.
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| finance | The sale/purchase of assets.
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| fixed exchange rate system | A system in which exchange rates are determined by
governments and central banks rather than the free market, and maintained through foreign exchange market intervention.
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| flexible (floating) exchange rate system | A system in which exchange rates are allowed to fluctuate with the forces of supply and demand. See also clean floating and dirty floating.
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| globalization | Notion that the world is moving toward a single global economy.
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| interest differential | Difference between rates of interest paid in different countries for the same asset, or in the same country for different assets.
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| internal balance | Occurs when output equals potential output.
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| intervention | Sales or purchases of foreign exchange by the central bank in order to stabilize exchange rates.
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| managed (dirty) floating | Flexible exchange rate system in which central banks intervene in exchange markets to moderate short-run fluctuations in exchange rates.
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| marginal propensity to import | The increase in the demand for imports that results from a one-unit increase in domestic income.
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| Mundell-Fleming model | Model first proposed by Robert Mundell and Marcus
Fleming that explores economy with flexible exchange rates and perfect capital mobility.
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| net investment income | The interest and profits that result from foreign assets held by domestic residents less the income foreigners earn on the domestic assets they own.
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| nominal exchange rate | The price of one currency in terms of another.
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| open economy | An economy that trades goods, services, and assets with other countries.
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| perfect capital mobility | Capital is perfectly mobile when it has the ability to move
instantly, and with a minimum of transactions costs, across national borders in search of the highest return.
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| purchasing power parity (PPP) | Theory of exchange rate determination arguing that
the exchange rate adjusts to maintain equal purchasing power of foreign and domestic currency.
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| real exchange rate | Purchasing power of foreign currency relative to the U.S. dollar.
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| repercussion effects | Feedback of domestic economic changes through foreign economies and back into the domestic economy.
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| reserves | Part of a bank's deposit kept at the Fed, or in its vaults; money that a bank keeps on hand instead of lending out.
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| revaluation | Increase in the value of the domestic currency relative to the currencies of other countries. Used when exchange rates are fixed.
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| trade | See international trade.
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| trade balance | The net flow of dollars into the country due to sales of goods abroad.
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