macroeconomic mcgrowhill micro ch 24 19e use this one

Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Fixed Exchange Rates Exchange Controls and Ra Transactions Take Pla

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The Balance of Payments, Exchange

Rates, and Trade Deficits

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38 - 2

Copyright McGraw-Hill/Irwin, 2002

U.S Export Transaction

U.S Import Transaction

Balance of Payments

Flexible Exchange Rates

The Market for Currency

Determinants of Exchange

Rates

Fixed Exchange Rates

Exchange Controls and Ra

Transactions Take Place

• About the Balance Sheet the United States Uses to Account for the International

Payments it Makes and Receives

• How Exchange Rates are Determined in Currency Markets

• The Difference Between Flexible Exchange Rates and Fixed Exchange Rates

• The Causes and Consequences of Recent Record-High U.S Trade Deficits

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International Transactions

• International trade

– Buy/sell current goods or services – Imports and exports

• International asset transactions

– Buy/sell real or financial assets

– Buy stock

– Sell your house to a foreigner

• Requires currency exchange

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Rates

End

Show

Financing International Trade

• U.S Export Transactions

• U.S Import Transactions

• Balance of Payments

• The Current Account

– Balance on Goods – Balance on Services – Trade Deficit

– Trade Surplus – Balance on Current Account

W24.1

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Rates

£150,000

£150,000 check drawn on British bank to pay for computers

£150,000 check is exchanged for

$300,000 at a New York bank New York bank sends £150,000 check to London bank for future sale to buyers who need pounds









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Rates

£150,000 check purchased from U.S bank to pay for CDs for

$300,000

£150,000 check is exchanged for

CD purchase from supplier

CD firm deposits £150,000 check

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Rates

Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply.

U.S IMPORT TRANSACTION

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Rates

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Rates

End

Show

Causes of Trade Deficit

• U.S Economic growth/consumption

• Large deficit with China and growing

• Rapidly rising oil imports and oil prices

• A declining savings rate in the U.S (average propensity to consume)

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Rates

End

Show

Australia Brazil

Netherlands

Canada China

Germany Japan

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Rates

End

Show

Financing International Trade

U.S Trade Balances in Goods and Services Select Nations, 2004 (compare China to ’99)

Goods and Services Surplus Good and Services Deficit

Australia Belgium

Canada China Germany

Mexico Netherlands

+6.8 -66.5

-45.8

+4.4 -162

Japan -75.6

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Rates

End

Show

U.S Trade Balances

Goods and Services, Select Nations, 2007

Surplus Deficit

Australia Belgium

Canada China Germany

Mexico Netherlands

+10.0 -67.0

-45.3

+9.8 -256.6

-77.3 +14.3

Source: Bureau of Economic Analysis

-10 -20 -30 -40 -50 -60 -70 -250 10 20

Japan -85.0

38-14

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Rates

End

Show

U.S Trade Balances

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Rates

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Rates

End

Show

Flexible Exchange Rates

• Demand for pounds

• Supply of pounds

• Market equilibrium

• Increase in dollar price of pounds

– Dollar depreciates – Pound appreciates

• Decrease in dollar price of pounds

– Dollar appreciates – Pound depreciates

38-17

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Rates

The Market for Foreign Currency (Pounds)

Dl

Sl

Dollar Depreciates (Pound

Appreciates)

Dollar Appreciates (Pound

Depreciates)

Exchange Rate: $2 = £1

$2

$3

$1

Ql

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• Determinants of exchange rates

• Factors that shift demand/supply

– Changes in tastes – Relative income changes – Relative price-level changes

• Purchasing-power-parity theory – Relative interest rates

– Relative expected returns on assets – Speculation

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Rates

The Market for Foreign Currency (Pounds)

Dl

Sl

Exchange Rate:

$3 = £1

Balance

Of Payments Deficit

Q2

b c

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• Eliminate balance of payments deficit or surplus

• Disadvantages of flexible exchange

rates – Volatility – Uncertainty and diminished trade – Terms-of-trade changes

– Instability

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– Restricted choice – Black markets

• Macroeconomic adjustments

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– Restricted choice – Black markets

• Macroeconomic adjustments

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Rates

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U.S Trade Deficit

• Large and persistent

• Causes of trade deficits

–High U.S growth (relatively)

–China

–Price oil

–Low U.S saving rate

• Implications of trade deficits

–Increased current consumption

–Increased indebtedness 38-26

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0 -50 -100 -150 -200 -250 -300 -350 -400 -450 -500 -550 -600 -650 -700 -750 -800 -850 -900

2001 2002 2003 2004 2005 2006 2007 2008 2009

0 -50 -100 -150 -200 -250 -300 -350 -400 -450 -500 -550 -600 -650 -700 -750 -800 -850 -900

Goods and Services

Balance on Current Account

U.S Trade Deficits

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Rates

End

Show

Speculation in Currency Markets

• Currency Purchases to Purchase Goods and Services

• Contributing to Currency Market Fluctuations

• Speculator’s Role and Activities

• Smoothing Short-Term Fluctuations

• Absorbing Risk

• Futures Market at Work

• Positive Role Played Overall

Negative or Positive Influence

on Currency Markets and Trade

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Rates

• official reserves

• flexible- or floating- exchange-rate system

• fixed-exchange-rate system

• purchasing-power-parity theory

• managed floating exchange rates

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