Glossary
Appreciation
An increase in the value of a country's currency relative to another currency, making its goods more expensive for foreigners.
Example:
If the U.S. dollar strengthens from 1 = 110 yen, the dollar has experienced Appreciation.
Balance of Payments
A summary record of all economic transactions between a country and the rest of the world over a specific period, typically a year.
Example:
If the U.S. sells more goods and services to other countries than it buys, this would be reflected in its Balance of Payments.
Capital Account
A component of the Balance of Payments that records international transactions involving financial assets (like stocks and bonds) and real assets (like land and businesses).
Example:
If a Chinese firm buys a factory in the United States, this transaction would be recorded in the U.S. Capital Account.
Capital Flows
The movement of money for the purpose of investment, trade, or business operations from one country to another.
Example:
Higher interest rates in Canada might attract more foreign investment, leading to increased Capital Flows into Canada.
Credit (+)
An entry in the Balance of Payments that represents money flowing into a country, such as exports or foreign investment.
Example:
A foreign tourist spending money on a vacation in France would be recorded as a Credit (+) for France.
Current Account
A component of the Balance of Payments that records a country's net trade in goods and services, net investment income, and net transfers.
Example:
When a country imports more cars than it exports, it contributes to a deficit in its Current Account.
Debit (-)
An entry in the Balance of Payments that represents money flowing out of a country, such as imports or domestic investment abroad.
Example:
A U.S. company buying a factory in Germany would be recorded as a Debit (-) for the U.S.
Depreciation
A decrease in the value of a country's currency relative to another currency, making its goods cheaper for foreigners.
Example:
If the British pound falls from £1 = 1.20, the pound has experienced Depreciation.
Exchange Rates
The price of one country's currency in terms of another country's currency.
Example:
If 1 U.S. dollar can buy 0.92 Euros, then 0.92 Euros per dollar is the Exchange Rate.
Financial Assets
Claims on property or income of the borrower, such as stocks, bonds, and bank deposits, traded internationally.
Example:
An American investor purchasing Japanese government Financial Assets (bonds) would be a capital outflow from the U.S.
Foreign Exchange Market (FOREX)
A global decentralized market where currencies are traded, determining exchange rates.
Example:
When a multinational corporation converts its profits from Euros to U.S. dollars, it conducts this transaction in the Foreign Exchange Market (FOREX).
Net Exports (NX)
The value of a country's total exports minus the value of its total imports of goods and services.
Example:
If Japan exports 300 billion in oil, its Net Exports would be $200 billion.
Net Investment Income
The difference between the income a country's residents earn from their investments abroad and the income foreigners earn from their investments in that country.
Example:
A U.S. company earning profits from its factory in Mexico, minus a German company earning dividends from its stock in a U.S. firm, contributes to the U.S.'s Net Investment Income.
Net Transfers
Unilateral payments made between countries, such as foreign aid, grants, and remittances, for which no goods or services are exchanged.
Example:
When a worker in the U.S. sends money back to their family in the Philippines, this is recorded as a Net Transfer.
Real Assets
Tangible physical assets like land, buildings, and businesses that are bought and sold across international borders.
Example:
When a Canadian company acquires a hotel chain in Florida, it's an international transaction involving Real Assets.