A 6-step visual walkthrough of Open Economy: International Trade and Finance — the foreign exchange market, exchange rate shifts, and net export effects, built right into the page.
The balance of payments has two main parts: the current account (goods, services, income, transfers) and the financial account (asset flows). Under a floating exchange rate, they roughly offset each other.
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The Foreign Exchange Market
Just like any other market: supply and demand for a currency set its exchange rate. Anything that shifts demand for the dollar (more exports, higher interest rates) or supply of the dollar (more imports) changes its price.
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Currency Appreciation
Higher foreign demand for exports, higher relative interest rates, or more foreign investment shift currency demand right, causing the currency to appreciate (exchange rate rises).
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Appreciation → Net Exports
A stronger currency makes a country's exports more expensive abroad and imports cheaper at home — both effects push net exports down, shifting AD left.
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Interest Rates & Capital Flows
Higher relative real interest rates attract foreign investors seeking better returns. To invest, they must first buy the local currency, increasing demand and causing appreciation.
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Policy Effects on the Exchange Rate
Monetary and fiscal policy can pull exchange rates in opposite directions: expansionary monetary policy lowers rates and depreciates the currency, while larger deficits raise rates and appreciate it.
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How to use the visual review
Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"
Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.
This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 6.