Copyright 2008 The McGraw-Hill Companies 19-1 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates

Copyright 2008 The McGraw-Hill Companies19-1

Financing International Trade

Capital and Financial Account

Flexible Exchange Rates

Fixed Exchange Rates

International Exchange-Rates System

Recent U.S. Trade Deficits

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19Exchange Rates, the Balance of Payments, and Trade Deficits








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Chapter Objectives• How Currencies of Different Nations

are Exchanged When International 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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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

W19.1








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U.S. Trade Balances in Goods and ServicesSelect Nations, 2004

Goods and Services SurplusGood and Services Deficit

Australia

Belgium

Canada

China

Germany

Mexico

Netherlands

+6.8

-66.5

-45.8

+4.4

-162

-45.1

+11.8

Source: BEA

GLOBAL PERSPECTIVE

-10-20-30-40-50-60-70-160 10 20

Japan -75.6








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• Capital Account• Financial Account• Balance on the Capital and

Financial Account–Payments, Deficits, and

Surpluses–Balance-of-Payments

Deficits and Surpluses–Official Reserves








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Flexible Exchange Rates• Flexible or Floating Exchange

Rates• Fixed Exchange Rate system• Depreciation and Appreciation• Determinants of Exchange

Rates– Changes in Tastes– Relative Income Changes– Relative Price-Level Changes

• Purchasing-Power-Parity Theory– Relative Interest Rates– Speculation

G19.1








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Q0

Do

llar

Pri

ce o

f 1

Po

un

d

Quantity of Pounds

P

Flexible Exchange RatesThe Market for Foreign Currency (Pounds)

Dl

Sl

DollarDepreciates(PoundAppreciates)

DollarAppreciates(PoundDepreciates)

ExchangeRate: $2 = £1

$2

$3

$1

Ql








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Q0

Do

llar

Pri

ce o

f 1

Po

un

d

Quantity of Pounds

P

Flexible Exchange RatesThe Market for Foreign Currency (Pounds)

Dl

Sl


$2

$3

$1

Ql

D2


BalanceOf Payments

Deficit

Q2

x a

b

c








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• Flexible Rates and the Balance of Payments

• Disadvantages of Flexible Exchange Rates

• Uncertainty and Diminished Trade

• Terms-of-Trade Changes• Instability








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Fixed Exchange Rates• Use of Reserves

– Currency Interventions• Trade Policies• Exchange Controls and

Rationing– Distorted Trade– Favoritism– Restricted Choice– Black Markets

• Domestic Macroeconomic Adjustments








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International Exchange-Rate Systems

• The Gold Standard: Fixed Exchange Rates–Devaluation

–Gold Flows

–Domestic Macroeconomic Adjustments

–Collapse of the Gold Standard








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• The Bretton Woods System– International Monetary Fund

(IMF)– IMF and Pegged Exchange

Rates• Official Reserves• Gold Sales• IMF Borrowing

– Fundamental Imbalances: Adjusting the Peg

– Demise of the Bretton Woods System








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• The Current System: The Managed Float–Managed Floating

Exchange Rates• In Support of the Managed Float

• Concerns With the Managed Float








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Recent U.S. Trade Deficits• Causes of Trade

Deficits• Implications of U.S.

Trade Deficits–Increased Current Consumption

–Increased U.S. Indebtedness








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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

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Negative or Positive Influence on Currency Markets and Trade








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Key Terms• balance of payments• current account• balance on goods an

d services• trade deficit• trade surplus• balance on current ac

count• capital and financial a

ccount• balance on capital an

d financial• balance-of-payments

deficits and surpluses

• official reserves

• flexible- or floating- exchange-rate system

• fixed-exchange-rate system

• purchasing-power-parity theory

• currency interventions

• exchange controls• gold standard• devaluation• Bretton Woods syste

m• International Monetar

y Fund (IMF)• managed floating exc

hange rates








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Course Review…

FinalDiscussions…

Documents

Copyright 2008 The McGraw-Hill Companies 19-1 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates