lec-13 - ch 33 - exchange rates and bop - miller edited.ppt

of Payments
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The Balance of Payments and International Capital Movements
! "alance o# $rade

The Balance of Payments and International Capital Movements (cont'd
! "alance o# Pay)ents


! iseuili&riu)
% I# e(penditures e(ceed inco)e, the situation cannot continue inde#initely
! Euili&riu)

! $hree categories o# &alance o# pay)ents transactions
1. Current account transactions
2. Capital account transactions

! Current Account

! Current account transactions
! $angi&le ite)s7things you can #eel, touch and see
% *ervice e(ports and i)ports
% 8nilateral trans#ers

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! "alancing the current account
% Current account surplus
! <et e(ports plus unilateral trans#ers plus net invest)ent inco)e e(ceeds :ero
% Current account de#icit

! A current account de#icit )eans that 'e are i)porting )ore goods and services than 'e are e(porting

%hat If & & & ll governments attempted to re)ire their nations to have c)rrent acco)nt s)rpl)ses*
! "y de#inition, a current account surplus arises in a nation 'hen its residents e(port )ore goods and services than they i)port.
! $he only 'ay #or so)e nations to have current account surpluses is #or others to operate 'ith current account de#icits.

! Capital Account

Capital account + Current account = 0
! $he current account and capital account )ust su) to :ero

Copyright ©2014 Pearson Education, Inc. All rights reserved. 331/
+ig)re 33"# $he >elationship "et'een the Current Account and the Capital Account
Sources: International Monetary Fund; Economic Indicators.

! ##icial reserve account transactions
4. >eserve position in the I6?

! *pecial ra'ing >ights
% >eserve assets created &y the International 6onetary ?und #or countries to use in settling international pay)ent o&ligations
! International 6onetary ?und
% An agency #ounded to ad)inister an international #oreign e(change syste) and to lend to )e)&er countries that had &alance o# pay)ents pro&le)s

! @uestion
! Ans'ers
% Political sta&ility
,etermining +oreign Exchange Rates
! hen you &uy #oreign products, you have dollars
! "ut the #oreign country cant pay 'or=ers in dollars

,etermining +oreign Exchange Rates (cont-d
! ?oreign E(change 6ar=et
% A )ar=et in 'hich households, #ir)s and govern)ents &uy and sell national currencies
! E(change >ates

,etermining +oreign Exchange Rates (cont'd

! ?le(i&le E(change >ates
% E(change rates that are allo'ed to #luctuate in the open )ar=et in response to changes in supply and de)and
% *o)eti)es called floating exchange rates

! $he euili&riu) #oreign e(change rate
% Appreciation
! An increase in the e(change value o# one nations currency in ter)s o# the currency o# another nation
% epreciation

! Appreciation and depreciation o# Euros

! An e(a)ple o# derived de)and
% Assu)e the phar)aceuticals cost 100 euros per pac=age

! In panel +a-, 'e sho' the de)and schedule #or pac=ages o# European phar)aceuticals in the 8nited *tates

+ig)re 33"$ eriving the e)and #or Euros, Panel +a-

+ig)re 33"$ eriving the e)and #or Euros, Panel +&-


+ig)re 33"$ eriving the e)and #or Euros, Panel +c-

% In panel +d-, 'e see the derived de)and #or euros in the 8nited *tates in order to purchase the various uantities given in panel +a-

+ig)re 33"$ eriving the e)and #or Euros, Panel +d-

+ig)re 33"$ eriving the e)and #or Euros, Panel +e-


+ig)re 33"3 $he *upply o# Euros

+ig)re 33". $otal e)and #or and *upply o# Euros

+ig)re 33"/ A *hi#t in the e)and *chedule

! 6ar=et deter)inants o# e(change rates
% Changes in real interest rates
% Changes in productivity

The 1old 2tandard and the International Monetary +)nd
! $he gold standard
% An international )onetary syste) in 'hich nations #i( their e(change rates in ter)s o# gold

The 1old 2tandard and the International Monetary +)nd (cont'd
! $he gold standard
! 6ore gold #lo'ed out than #lo'ed in
! Euivalent to a restrictive )onetary policy
% A &alance o# pay)ents surplus
! 6ore gold #lo'ed in than out
! Euivalent to an e(pansionary )onetary policy

! Pro&le)s 'ith the gold standard
% A nation gives up control o# its )onetary policy
% <e' gold discoveries o#ten caused in#lation

! "retton oods and the International 6onetary ?und
% In 1;44, representatives o# capitalist countries )et in "retton oods, <e' a)pshire
! Created a ne' international pay)ent syste) to replace the gold standard
% 6e)&ers agreed to )aintain the value o# their currencies 'ithin 1F o# declared par value
! 6e)&ers allo'ed a oneti)e adGust)ent

! "retton oods and the I6?

+ixed vers)s +loating Exchange Rates
! $he 8nited *tates 'ent o## o# the "retton oods syste) o# #i(ed e(change rates in 1;3

+ig)re 33" Current ?oreign E(change >ate Arrange)ents
Source: International Monetary Fund.
+ixed vers)s +loating Exchange Rates (cont'd

+ig)re 33"4 A ?i(ed E(change >ate

lec-13 - ch 33 - exchange rates and bop - miller edited.ppt

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