Download Exchange Rates, The Balance of Payments, and Trade Deficits

U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
36
C HAPTE R
Determinants of
Exchange Rates
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
EXCHANGE RATES,
THE BALANCE OF PAYMENTS,
AND TRADE DEFICITS
BALANCE OF PAYMENTS
(the sum of all the transactions that take place between a country’s
residents and the residents of all foreign nations, ie. all the payments
a nation receives from foreign countries and all the payments it
makes to them). Comprised of 3 Accounts:
U.S. Export Transaction
U.S. Import Transaction
1) Current Account- summarizes US trade in currently produced goods
Balance of Payments
and services; comprised of:
Flexible Exchange Rates
The Market for Currency
a) Balance on Goods & Services- difference between a country’s
Determinants of
Exchange Rates
imports and exports of goods.
Fixed Exchange Rates
b) Balance on Current Account – balance on G & S plus + Net
Exchange Controls and
Rationing
inv. Income + Net Transfers
i) Net Inv. Income- difference between the interest and dividend
Recent U.S. Trade
payments foreigners paid the US for use of exported capital and
Deficits
what the US paid foreigners for imported foreign capital.
Key Terms
ii) Net Transfers- foreign aid, pensions paid to US citizens living
outside US.
International Exchange
Rate Systems
2) Capital Account- summarizes the purchase or sale of real or financial
assets and the flows of monetary payments that accompany them.
a) Balance on Capital Account- Current Account plus foreign
purchases of assets in US and US purchases of assets abroad.
BALANCE OF PAYMENTS cont’d
3) Official Reserves Account- quantities of foreign currencies
U.S. Export Transaction
held by a foreign govt. drawn on to make up any net deficit in the
combined current and capital accounts (sort of like when you dip into
Balance of Payments
Flexible Exchangeyour
Rates savings account to pay for a special purchase)
U.S. Import Transaction
The Market for Currency
Determinants of
Exchange Rates
Balance of Payments- must always sum to zero, ie.
always in balance; Deficits & Surpluses occur in
the Current and Capital Account
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
-Check out this explanation
[If you bought a parachute from a factory in Germany–Current Account]
[If you bought a parachute factory in Germany – capital investment, so Capital Account]
Current Account [trade in currently produced goods, svcs, net investment & transfers]
(1) U.S. goods exports……………………………………………$+ 683
U.S.
Export
Transaction
(2)
U.S.
goods imports………………………………………..…...-1,167
U.S.
Import
Transactionon goods [visibles]………..…………………………………………..$-484
(3)
Balance
Balance
of Payments
(4) U.S.
exports of services [shipping, insur., tourists, bank.] +289
Flexible Exchange Rates
(5) U.S. imports of services…………………………………..…….- 240
The Market for Currency
(6) Balance on services [invisibles]………………………..................................+ 49
Determinants of
(7) Balance
on goods and services…………………………………….…………..-436
Exchange
Rates
(8)Exchange
Net investment
income (income earned for svc of exported capital [money]
Fixed
Rates
Exchange
Controls and
[Profits
received from overseas investment (interest, dividends, and rents)]
Rationing
……………………………………………………………………… - 12
International Exchange
(9)Systems
Net transfers (gifts given to the indivs, foreign aid, pensions, etc.)…… - 56
Rate
(10)U.S.Balance
on current account…………………………………………………... -504
Recent
Trade
Deficits
Capital Account [buying/selling of physical & financial assets[stocks/bonds]
Key Terms
(11) Foreign purchases of assets in the U.S. …………………..+645
-4
(12) U.S. purchases of assets abroad……………….……………-145
(13) Balance on capital account…………………………………………….…..….+500
Official Reserves Account
(14) Official reserves (Exported $4 bil. of foreign money)…….. +4
$0
Official Reserves: + = exported stock of foreign money (so dollars enter U.S.)
- = imported stock of foreign money (so dollars exit U.S.)
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
U.S. Export Transaction
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exorts…………………………...…+40
U.S. Service imports………………………….…-90
Goods exports……………..
Net Investment
income………………..……….+20
Goods imports……………..
Net transfers………………………………….…..-15
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Capital inflows to the U.S…………………..….+40
Capital outflows from the U.S……………….…-10
Official reserves ………………......................…..-5
Determinants of
Exchange Rates
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
Fixed Exchange Rates
Goods exports (____) – goods imports (____) = $_____
Exchange Controls and
2.
The U.S.’s balance on goods and services is a (deficit/surplus) of $30 billion.
Rationing
(goods/services
exports(____) – goods/services imports (____) = ______)
International
Exchange
Rate
SystemsU.S.’s balance on the current account is (+25/-$25).
3. The
Recent
U.S. Tradeon
[Balance
Deficits
g/s(___) + net investment income(___) + net transfers(___) = C.A.(___)].
4. The balance on the capital account is a (surplus/deficit) of ($20/$30/$40).
Key Terms
[capital inflow(___) – capital outflow(___) = _______]
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money($’s will enter U.S.]
[A - here means we will import a stock of foreign money($’s will exit U.S.]
Balance on Goods
Bal. on Curr. Acct.
U.S. Export Transaction
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………..-80
U.S. Service exports…………………………... +40
U.S. Service imports………………………….…-90
Net Investment
income………………..……….+20
Goods exports……………..
Goods imports……………..
Net transfers………………………………….….-15
20
-50
G/S
-30
Bal.
Cap.
Flexibleon
Exchange
RatesAcct.
The Market for Currency
Capital inflows to the U.S…………………..….+40
Capital outflows from the U.S……………..….-10
Official reserves ………………......................….-5
-25
5
U.S. Import Transaction
Balance of Payments
Curr.
Acct
30
5
Determinants of
Exchange Rates
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
FixedGoods
Exchange Rates
exports ($100) – goods imports ($80) = $20.
Exchange
and balance on goods and services is a (deficit/surplus) of $30 billion.
2. TheControls
U.S.’s
Rationing
(goods/services exports($140) – goods/services imports ($170) = -$30)
International Exchange
3. The
Rate
SystemsU.S.’s balance on the current account is (+25/-$25).
[Balance
Recent
U.S. Tradeon g/s(-$30) + net investment income($20)+ net transfers(-$15)=C.A.(-$25)].
Deficits
4.
The balance on the capital account is a (surplus/deficit) of ($20/$30/$40).
Key Terms
[capital
inflow($40) – capital outflow(-$10) = $30]
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money($’s will enter U.S.]
[A - here means we will import a stock of foreign money($’s will exit U.S.]
Balance on Goods
Bal. on Curr. Acct.
U.S. Export Transaction
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………..-80
U.S. Service exports…………………………... +40
U.S. Service imports………………………….…-90
Net Investment
income………………..……….+20
Goods exports……………..
Goods imports……………..
Net transfers………………………………….….-15
20
-50
G/S
-30
Bal.
Cap.
Flexibleon
Exchange
RatesAcct.
The Market for Currency
Capital inflows to the U.S…………………..….+40
Capital outflows from the U.S……………..….-10
Official reserves ………………......................….-5
-25
5
U.S. Import Transaction
Balance of Payments
Curr.
Acct
30
5
Determinants of
Exchange Rates
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
FixedGoods
Exchange Rates
exports ($100) – goods imports ($80) = $20.
Exchange
and balance on goods and services is a (deficit/surplus) of $30 billion.
2. TheControls
U.S.’s
Rationing
(goods/services exports($140) – goods/services imports ($170) = -$30)
International Exchange
3. The
Rate
SystemsU.S.’s balance on the current account is (+25/-$25).
[Balance
Recent
U.S. Tradeon g/s(-$30) + net investment income($20) + net transfers(-$15)=C.A.(-$25)]
Deficits
4.
The balance on the capital account is a (surplus/deficit) of ($20/$30/$40).
Key Terms
[capital
inflow($40) – capital outflow(-$10) = $30]
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money($’s will enter U.S.]
[A - here means we will import a stock of foreign money($’s will exit U.S.]
A Few notes on BOP
• If you look at the U.S. balance of payments or any other country you
will see that the balance of the current account will offset the capital
U.S. Export
Transaction except for immaterial differences (ignore these, they are
account,
U.S. Import
Transaction
primarily
timing differences).
Balance of Payments
• The reason is a logical and simple one: each country is unable to use
Flexible Exchange Rates
the other countries currency and, thus, all each country can do is
The Market for Currency
"trade". Using China as an example, the U.S. has a current account
Determinants of
Exchange deficit
Rates
(we buy more of their products & services than China does of
Fixed Exchange
Rateswhich puts China in a position of saying: "hmmm, what do I do
ours),
Exchange with
Controls and
these worthless U.S. dollars?" Since China, by the fact of a
Rationing
U.S. current account deficit, did not spend the U.S. dollars we sent
International Exchange
Rate Systems
them on our own products/exports, and being the intelligent country
Recent U.S.
Tradethey are, China will always decide to "invest" or "save" their
that
Deficits
U.S. dollars via the Capital Account by using those same US
Key Terms
dollars to invest in US financial assets (bonds, stocks, etc.), or real
assets (land, US manufacturing plants, etc.)
• So whenever you buy those shirts from China you are helping to fund
the U.S. Government's deficit spending and those same U.S. dollars
you paid for the shirts will be flowing directly to an American company
and worker making frisbees.
Said another way:
• The U.S. currently has a large current account deficit with China (we're buying,
net, more of their products & services than vice versa). China (businesses,
households, government) has willingly elected to save many of the U.S. dollars we
U.S. Export Transaction
sent them for their products. Since China is an intelligent country, they will, through
U.S. Import Transaction
self interest, create a capital account surplus to the U.S. by saving those same U.S.
Balance of Payments
dollars (sent to them for their products) by investing them in U.S. financial assets
Flexible
Exchange
Rates
(U.S.
bonds,
U.S. stocks, U.S. saving accounts, etc.) or use those same US dollars to
The Market
Currency
buildforU.S.
plants or buy land in the U.S. The opportunity cost would be high for
Determinants
Chinaof to just to just hold those U.S. dollars in a mayonnaise jar or use them for
Exchange Rates
kindling to start their fires.
Fixed Exchange Rates
•Exchange
Said
another way, "trade" is really trade like the early settlers did since countries
Controls and
Rationing
cannot use the other country's currency so they are forced to immediately spend it
backExchange
into the originating country. In the case of China, they are temporarily saving
International
Rate Systems
the U.S. dollars they received for their products, but will ultimately spend them back
Recentinto
U.S. Trade
our economy.
Deficits
•Key Terms
One interesting thought, is everytime an American buys a shirt from China you are
actually funding American jobs as well, which is why trade is always the way to
go. In the case of China, the prevalent scenario is the US dollars spent for the
Chinese shirt (U.S. import) is being lent back to the US Government (due to deficit
spending) to returf the lawn on the Mall! Trade is trade and is always balanced
(current account = capital account). The only question is what is being traded.
Flexible Exchange Rates
Two Systems:
1) Flexible or Floating- Exchange-Rate
System- demand and supply determine exchange
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
rates, not govt.
2) Fixed Exchange-Rate System- govts.
Fixed Exchange Rates
Exchange Controls and
Rationing
Determine exchange rates and make adjustments in their
economies to maintain those rates.
Recent U.S. Trade
International Exchange
Rate Systems
Deficits
Key Terms
DISADVANTAGES OF
FLEXIBLE EXCHANGE RATES
•Uncertainty and
Diminished Trade
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
Fixed Exchange Rates
•Terms of Trade
Changes
•Instability of a Country’s
Currency
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
FIXED EXCHANGE RATES
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Use of Reserves
•Currency
Interventions
Recent U.S. Trade
Deficits
Key Terms
Trade Policies
EXCHANGE CONTROLS & RATIONING
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
•Distorted Trade
•Favoritism
•Restricted Choice
•Black Markets
INTERNATIONAL EXCHANGERATE SYSTEMS
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of
Exchange Rates
Fixed Exchange Rates
Exchange Controls and
Rationing
International Exchange
Rate Systems
Recent U.S. Trade
Deficits
Key Terms
The Gold Standard: Fixed
Exchange Rates 1879 - 1934
Devaluation
The Bretton Woods System
IMF - Pegged Exchange Rates
Official Reserves
Gold Sales
IMF Borrowing
Managed Floating Exchange Rates
G-8 Nations Interventions