Chapter 38 - The balance of payments, exchange rates, and trade deficits. This chapter explain how currencies of different nations are exchanged when international transactions take place, analyze the balance sheet the United States uses to account for the international payments it makes and receives, discuss how exchange rates are determined in currency markets, describe the difference between flexible exchange rates and fixed exchange rates, Identify the causes and consequences of recent record-high . trade deficits. | The Balance of Payments, Exchange Rates, and Trade Deficits Chapter 38 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives How currencies are exchanged Balance sheet for recording international payments How exchange rates are determined Flexible vs. fixed exchange rates Causes and consequences of trade deficits 38- 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 38- Balance of Payments Sum of international financial transactions Current account Balance on goods and services Net investment income Net transfers Balance on current account 38- Balance of Payments Capital and financial account Capital account Financial account Balance of payments accounts sum to zero Current account deficits generate asset transfers to foreigners Official reserves 38- . Trade Balances Goods and Services, Select Nations, 2007 Surplus Deficit Australia Belgium Canada China Germany Mexico Netherlands + + + Source: Bureau of Economic Analysis -10 -20 -30 -40 -50 -60 -70 -250 10 20 Japan 38- 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- Q 0 Dollar Price of 1 Pound Quantity of Pounds P Flexible Exchange Rates The Market for Foreign Currency (Pounds) D1 S1 Dollar Depreciates (Pound Appreciates) Dollar Appreciates (Pound Depreciates) Exchange Rate: $2 = £1 $2 $3 $1 Q1 38- Flexible Exchange Rates 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 . | The Balance of Payments, Exchange Rates, and Trade Deficits Chapter 38 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives How currencies are exchanged Balance sheet for recording international payments How exchange rates are determined Flexible vs. fixed exchange rates Causes and consequences of trade deficits 38- 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 38- Balance of Payments Sum of international financial transactions Current account Balance on goods and services Net investment income Net transfers Balance on current account 38- Balance of Payments Capital and financial account Capital account Financial account Balance of payments accounts sum to zero Current account deficits generate asset transfers to foreigners .
