The illustration shows the following:

Trade balance equals net exports equals exports sold to foreign buyers minus imports bought from foreign sellers.

Nominal exchange rate: The price of a country’s currency (in terms of another country’s currency).

Nominal exchange rate equals number of yen over number of dollars.

Exchange becomes more expensive and is called appreciation. Exchange becomes cheaper and is called depreciation.

An illustration shows cyclic arrows depicting currency conversion between U S dollar and yen and is accompanied by the following text:

Convert U S dollars to yen. Number of yen equals number of dollars multiplied by nominal exchange rate.

Convert yen to U S dollars. Number of dollars equals number of yen over nominal exchange rate.

The next section summarizes foreign exchange market using a graph and shows the following:

Foreign market. A market where you can exchange one currency for another.

The horizontal axis of the graph shows quantity of U S dollar and the vertical axis shows the exchange rate in yen. An upward sloping curve depicts the demand and a downward sloping curve depicts the supply of U S dollars. The point of instersection of these curves meets the vertical axis at 120 yen.

A callout points to the vertical axis and reads the price in this market is the nominal exchange rate.

Supply of dollars: increases when Americans buy foreign products and assets (imports and capital outflows)

Equilibrium: determines the price of U S dollars (the nominal exchange rate)

Demand for dollars: increases when foreigners buy American products and assets (exports and capital inflows)

The section following this shows an illustration depicting real exchange rates and net exports.

Text surrounds a long, right-pointed arrow. The left end of the arrow corresponds to low exchange rate and the accompanying text reads as follows: internationally competitive American prices (in U S dollars) are low relative to foreign prices (also in U S dollars). Americans import few foreign goods. Foreigners buy a lot of American exports.

The right end corresponds to high exchange rate and the surrounding text reads as follows: Internationally uncompetitive. American prices (in U S dollars) are high relative to foreign prices (also in U S dollars). Americans import a lot of foreign goods. Foreigners buy few American exports.

Real exchange range equals domestic price in dollars over foreign price converted in dollars equals domestic price in dollars over (foreign price in foreign currency over nominal exchange rate)

The next section summarizes the balance of payments and shows the following:

Current account balance equals income from abroad minus income paid abroad

Financial account balance equals financial inflows minus financial outflows

Inflows equals income from abroad plus financial inflows

Outflows equals income paid abroad plus financial outflows

Inflows equals outflows

Income from abroad plus financial inflows equals income paid abroad plus financial outflows

Financial inflows minus financial outflows together labeled as financial account surplus equals income paid abroad minus income from abroad together labeled as current account deficit.