Embed Size (px)
Citation preview
Eco 200 – Principles of Macroeconomics
Chapter 7: Foreign Exchange Markets and the Balance of
Payments
Foreign exchange market Foreign exchange = money
denominated in foreign currency
Foreign exchange market Foreign exchange = money
denominated in foreign currency Foreign exchange market = global
market in which currencies are exchanged for each other
Foreign exchange market Foreign exchange = money
denominated in foreign currency Foreign exchange market = global
market in which currencies are exchanged for each other
Most foreign exchange transactions involve the purchase and sale of bank deposits
Exchange rate Exchange rate = price of one
currency in terms of another
Exchange rate Exchange rate = price of one
currency in terms of another Reciprocal exchange rates – If $1 is
worth ½ of a British pound, each British pound is worth 2 dollars.
Exchange rate Exchange rate = price of one
currency in terms of another Reciprocal exchange rates – If $1 is
worth ½ of a British pound, each British pound is worth 2 dollars.
Domestic currency price = foreign currency price x exchange
rate
Appreciation and depreciation If the domestic currency appreciates,
Imports become less expensive Imports rise
Exports become more expensive in the rest of the world.
Exports decline
Appreciation and depreciation If the domestic currency appreciates,
Imports become less expensive Imports rise
Exports become more expensive in the rest of the world.
Exports decline If the domestic currency depreciates,
Imports become more expensive Imports decline
Exports become less expensive in the rest of the world.
Exports rise
Balance of payments Double-entry bookkeeping
Two sides to each transaction Dollar value of money flowing into the country
must equal the dollar value of the money flowing out (two sides of the same transaction)
Balance of payments Double-entry bookkeeping
Two sides to each transaction Dollar value of money flowing into the country
must equal the dollar value of the money flowing out (two sides of the same transaction)
Credits activities that brings payments into the country
Balance of payments Double-entry bookkeeping
Two sides to each transaction Dollar value of money flowing into the country
must equal the dollar value of the money flowing out (two sides of the same transaction)
Credits activities that brings payments into the country
Debits activities that involve payments to the rest of
the world
Current and financial accounts Current account = trade in goods
and services
Current and financial accounts Current account = trade in goods
and services Financial account = trade in
financial assets
Current and financial accounts Current account = trade in goods
and services Financial account = trade in
financial assets Net balance on current account
+ net balance on financial account + statistical discrepancy = 0 (overall balance of payments = 0)
Current account Merchandise – trade in goods
Current account Merchandise – trade in goods Services – trade in services
Current account Merchandise – trade in goods Services – trade in services Income = payment for labor and
capital services (interest and dividend payments)
Current account Merchandise – trade in goods Services – trade in services Income = payment for labor and
capital services (interest and dividend payments)
Unilateral transfers – payments for which no goods or services are provided in return
Current account
Balance of payment accounts – 2000 (in millions)Account Credit Debit Net
balance
Merchandise $183,728
$289,566
-$105,838
Services $71,309 $51,647 $19,662
Income $79,749 $83,949 -$4,200
Unilateral transfers -$11,925
Current Account -$102,301
Financial Account $215,008
$143,283
$71,725
Statistical discrepancy
-$30,410
Overall BOP $0
