Chapter 36 - International financial policy. After reading this chapter, you should be able to: Summarize some important data of trade, explain policies countries use to restrict trade, summarize the reasons for trade restrictions and why economists generally oppose trade restrictions, explain how free trade associations both help and hinder international trade. | A foreign exchange dealer’s office during a busy spell is the nearest thing to Bedlam I have struck. ―Harold Wincott International Financial Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Summarize the balance of payments accounts and explain the relationship between the current account and the financial and capital account Explain how exchange rates are determined and how government can influence them Discuss the problem of determining the appropriate exchange rate Differentiate various exchange rate regimes and discuss the advantages and disadvantages of each 2 The Balance of Payments Balance of payments is a country’s record of all transactions between its residents and the residents of all foreign nations These include a country’s buying and selling of goods and services (imports and exports) and interest and profit payments from previous investments, together with all the capital inflows and outflows These accounts record all payments made by foreigners to . citizens and all payments made by . citizens to foreigners in those years 3 The Current Account The current account (lines 1–14) is the part of the balance of payments account in which all short-term flows of payments are listed The balance of merchandise trade is the difference between the value of goods exported and the value of goods imported The balance of trade is the difference between the value of goods and services exported and imported 4 The Financial and Capital Account The financial and capital account (lines 15–25) is the part of the balance of payments account in which all long-term flows of payments are listed The capital account includes debt forgiveness, migrant’s transfers, and transfers related to the sale of fixed assets The financial account includes trade in assets such as business firms, bonds, stocks, and ownership right to real estate Official reserves are government holdings of foreign currencies 5 Exchange Rate | A foreign exchange dealer’s office during a busy spell is the nearest thing to Bedlam I have struck. ―Harold Wincott International Financial Policy Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Summarize the balance of payments accounts and explain the relationship between the current account and the financial and capital account Explain how exchange rates are determined and how government can influence them Discuss the problem of determining the appropriate exchange rate Differentiate various exchange rate regimes and discuss the advantages and disadvantages of each 2 The Balance of Payments Balance of payments is a country’s record of all transactions between its residents and the residents of all foreign nations These include a country’s buying and selling of goods and services (imports and exports) and interest and profit payments from previous investments, together with all the capital inflows and outflows These accounts
