Currency Exchange Rates and Accounting

The exchange rate between two currencies calculated using a third, benchmark currency, usually the US dollar.

A system where goods are directly exchanged for other goods based on their relative prices.

A method of recording all the expenditures that contribute to a country's output and income.

A system of recording changes in a country's indebtedness, international competitiveness, and the relationship between foreign transactions and the national money supply.

The total value of all final goods and services produced by a nation's factors of production (labor, capital, and natural resources) within a given period.

The process of converting one currency to another by multiplying or dividing by the exchange rate depending on the direction of conversion.

A decrease in the purchasing power of money over time, resulting in higher prices for goods and services.

The cost of borrowing money, expressed as a percentage of the amount borrowed.

The price of one unit of a foreign currency expressed in terms of the domestic currency.

A currency that is being bought or sold in a foreign exchange transaction.

The currency in which the transaction is denominated. It is typically the first currency in the currency pair.

A situation where the sum of a country's current account balance, capital account balance, and financial account balance equals zero.

A central bank intervenes to keep the exchange rate within a certain range, preventing it from going beyond the allowed limits. The central bank can adjust the parity value of the currency over time.

The exchange rate fluctuates freely within a wide range without any central bank intervention. The central bank might adjust the parity value from time to time.

An exchange rate that is managed by monetary authorities through interventions, but it can fluctuate within a broader interval. This flexibility allows for adjustments in the real exchange rate.

A system where there are two official exchange rates: one is fixed by the government and the other is determined by the market. The government controls the proportion of imports that can be purchased at the official rate.

The theory suggests that the exchange rate between two currencies will adjust to reflect the difference in the purchasing power of those currencies. It means that in the long run, the price of a basket of goods should be the same in both countries when expressed in a common currency.

The relationship of a domestic currency to a standard reference point, often gold, the US dollar, or the Special Drawing Right (SDR). It reflects the external value of a currency.

The value of a currency expressed in terms of the quantity of goods and services it can purchase. It reflects the internal value of a currency.

A decrease in the value of a currency, meaning it can purchase fewer goods and services than before. It reflects a decline in the currency's internal value.

An increase in the value of a currency, meaning it can purchase more goods and services than before. It reflects an increase in the currency's internal value.

An official reduction of a currency's value by a government or monetary authority. This directly impacts the currency's external value, or par value.

An official increase of a currency's value by a government or monetary authority. This directly impacts the currency's external value or par value.

A system where the exchange rate between two currencies is fixed at a predetermined level. The government actively manages the exchange rate by buying or selling foreign currency.

An approach to managing a fixed exchange rate where the central bank intervenes in the foreign exchange market only when the exchange rate deviates significantly from its target level.

The relative version of PPP states that changes in the exchange rate should be proportional to relative changes in price levels between two countries.

The absolute version of PPP states that the exchange rate between two currencies should equal the ratio of the price levels in those countries.

The law of one price states that the price of a good should be the same in different markets, after accounting for transportation and other costs.

Prices of goods and services in different countries, expressed in a common currency, are used to determine the purchasing power of different currencies.

The exchange rate is directly influenced by changes in price levels. When domestic prices rise, the currency depreciates and the exchange rate increases.

A system where currencies are directly linked to a specific amount of gold, allowing for convertibility at a fixed rate.

Total value of all final goods and services produced within a country's borders, including by foreign nationals residing in the country.

Income earned by a nation's factors of production (labor, capital, land, and entrepreneurship).

Expenditure by households on goods and services for consumption.

Expenditure by firms on new plants, equipment, and buildings.

Expenditure by government on goods and services, excluding transfer payments like welfare.

The difference between a country's exports and imports. (EX - IM)

Record of all economic transactions between residents of one country and the rest of the world over a specific period.

The most serious type of BoP disequilibrium, where imbalances are large and persist over long periods. This can lead to significant economic problems.

The process of interaction and integration among people, companies, and governments of different nations, driven by international trade and investment. It has effects on the environment, culture, political systems, economic development, and human well-being.

A social movement critical of the globalization of corporate capitalism. It opposes large multinational corporations having unregulated political power.

The amount of money households have available for spending after income tax is deducted.

Income earned by a nation's factors of production (labor, capital, land, and entrepreneurship).

When export equals import, consumption equals absorption, and national saving equals investment. In this case, the economy is in both internal and external balance.

A system where the value of one currency is fixed against another currency or a basket of currencies. The government intervenes to maintain the fixed exchange rate.

A system where the value of a currency is determined by market forces of supply and demand. The government does not intervene in the market.

Simultaneously buying and selling a currency in different forex markets to profit from exchange rate differences.

Buying or selling a currency with the expectation that its value will change in the future.

A contract that gives the holder the right, but not the obligation, to buy or sell a certain amount of currency at a specific price on or before a certain date.

The simultaneous sale of a currency spot and the forward repurchase of the same currency, or vice versa, to manage currency risk.

Using forward contracts or options to reduce the risk of fluctuations in currency exchange rates.

A contract to buy or sell a standardized amount of currency on a specific date at a specific future price.

Changes in money supply or demand influence changes in balance of payments and in exchange rate.

The key determinants of the exchange rate are changes in the money market. Shifts in supply and demand for money can affect exchange rates.

Under a fixed-exchange rate system, changes in balance of payment conditions cause changes in monetary reserves and money supply.

Under a flexible-exchange rate system, money supply depends on central bank activities.

Changes in foreign prices and real income affect money demand.

Flexible exchange rates automatically lead to a balance of payments equilibrium; if BP is balanced, there is no change in monetary reserves -- money supply only depends on domestic credit.

Exchange rate increases when money supply increases or money demand decreases. This increases the exchange rate (depreciation of domestic currency). Exchange rate decreases when money supply decreases or money demand increases. This decreases the exchange rate (appreciation of domestic currency).

The period from 1944-1958 in the Bretton Woods system, characterized by a high demand for US dollars and a shortage of dollars.

The period from 1959-1971 in the Bretton Woods system, characterized by the excessive use of US dollars.

The dollar taking on the same role as gold in the gold standard, where it was convertible to gold at a fixed price.

A monetary agreement between two or more countries that involves either fixed exchange rates or a single currency.

Areas that meet specific criteria for economic efficiency and are best suited for adopting a fixed exchange rate or a single currency.

Robert Mundell, a Nobel laureate in economics, is credited with developing the theory of optimal currency area.

The Bretton Woods system's structure allowed countries to devalue their currencies only in cases of significant imbalances in their balance of payments, with the IMF's approval.

A system where the exchange rate between currencies is determined solely by market forces (supply and demand) without government intervention.

A system where the central bank gradually adjusts the par value of the currency by small amounts over time. This helps prevent excessive fluctuations and keeps the currency competitive.

A set of measures taken by the government or central bank to stabilize the exchange rate. Interventions involve buying or selling foreign currency to influence supply and demand at the FX market.

The period between a change in the exchange rate and its actual impact on the balance of trade. This lag is often depicted using the J-curve.

A graphical representation showing the impact of a depreciation on the trade balance. Initially, there is a worsening of the balance, followed by an improvement over time.

A system where the value of a currency is pegged to another currency's value, with little flexibility.