Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Reserve currency wikipedia , lookup
Bretton Woods system wikipedia , lookup
Currency war wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
International monetary systems wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Foreign exchange market wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 2 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. 6/e. 6/e. Perez Perez Sheffrin, Tools andand Applications, Macroeconomics: Principles, Sheffrin, O’Sullivan, ToolsO’Sullivan, Applications, Principles, Macroeconomics: The World of International Finance Today, the world currency markets are always open. When foreign exchange traders in New York City are sound asleep at 3:00 A.M., their counterparts in London are already on their phones and computers at 8:00 A.M. PREPARED BY FERNANDO QUIJANO, YVONN QUIJANO, AND XIAO XUAN XU Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 3 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.1 HOW EXCHANGE RATES ARE DETERMINED What Are Exchange Rates? • exchange rate The price at which currencies trade for one another in the market. • euro The common currency in Europe. An increase in the value of a currency relative to the currency of another nation is called an appreciation of a currency. A decrease in the value of a currency relative to the currency of another nation is called a depreciation of a currency. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 4 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.1 HOW EXCHANGE RATES ARE DETERMINED How Demand and Supply Determine Exchange Rates FIGURE 19.1 The Demand for and Supply of U.S. Dollars Market equilibrium occurs where the demand for U.S. dollars equals the supply. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 5 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.1 HOW EXCHANGE RATES ARE DETERMINED Changes in Demand or Supply FIGURE 19.2 Shifts in the Demand for U.S. Dollars An increase in the demand for dollars will increase (appreciate) the dollar’s exchange rate. Higher U.S. interest rates or lower U.S. prices will increase the demand for dollars. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 6 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.1 HOW EXCHANGE RATES ARE DETERMINED Changes in Demand or Supply FIGURE 19.3 Shifts in the Supply of U.S. Dollars An increase in the supply of dollars will decrease (depreciate) the dollar exchange rate. Higher European interest rates or lower European prices will increase the supply of dollars. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 7 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.1 HOW EXCHANGE RATES ARE DETERMINED Changes in Demand or Supply Let’s summarize the key facts about the foreign exchange market, using euros as our example: 1 The demand curve for dollars represents the demand for dollars in exchange for euros. The curve slopes downward. As the dollar depreciates, there will be an increase in the quantity of dollars demanded in exchange for euros. 2 The supply curve for dollars is the supply of dollars in exchange for euros. The curve slopes upward. As the dollar appreciates, there will be an increase in the quantity of dollars supplied in exchange for euros. 3 Increases in U.S. interest rates and decreases in U.S. prices will increase the demand for dollars, leading to an appreciation of the dollar. 4 Increases in European interest rates and decreases in European prices will increase the supply of dollars in exchange for euros, leading to a depreciation of the dollar. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.2 REAL EXCHANGE RATES AND PURCHASING POWER PARITY REAL-NOMINAL PRINCIPLE What matters to people is the real value of money or income—its purchasing power—not the face value of money or income.. • real exchange rate The price of U.S. goods and services relative to foreign goods and services, expressed in a common currency. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 9 of 28 19.2 REAL EXCHANGE RATES AND PURCHASING POWER PARITY Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance FIGURE 19.4 Real Exchange Rate and Net Exports as Percent of GDP, 1980–2007 The figure shows the real exchange rate for the United States compared to its net exports as a share of GDP. Notice that, in general, when the real (multilateral) exchange rate increased, U.S. net exports fell. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 10 of 28 19.2 REAL EXCHANGE RATES AND PURCHASING POWER PARITY Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance • law of one price The theory that goods easily tradable across countries should sell at the same price expressed in a common currency. • purchasing power parity A theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 11 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance APPLICATION 1 BIG MACS AND PURCHASING POWER PARITY APPLYING THE CONCEPTS #1: Can the price of hamburgers around the world give us a clue to the proper value for exchange rates? For several years, the Economist measured the price of a Big Mac throughout the world and checked to see whether the law of one price held. Table 19.1 contains the results for selected countries and the market-exchange rate predicted by the theory of purchasing power parity. To obtain the exchange rate, divide the price of Big Macs in the foreign country by the dollar price. TABLE 19.1 BIG MAC PRICING AROUND THE WORLD VERSUS ACTUAL EXCHANGE RATES Country Price of a Big Mac in Local Currency United States United Kingdom Hong Kong Switzerland Mexico Japan 3.41 dollars 1.99 pounds 12.0 HK dollars 6.30 Swiss francs 29.0 pesos 250 yen Price of a Big Mac in Dollars $3.41 4.01 1.54 5.20 2.69 2.29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Predicted Purchasing Power Exchange Rate Based on Big Mac Pricing (Foreign Currency per U.S. Dollar) Actual Exchange Rate (Foreign Currency per U.S. Dollar) ____ ____ 0.58 3.52 1.85 8.50 73.30 0.50 7.82 1.21 10.80 109.20 12 of 28 19.3 THE CURRENT ACCOUNT, THE FINANCIAL ACCOUNT, AND THE CAPITAL ACCOUNT Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance • balance of payments A system of accounts that measures transactions of goods, services, income, and financial assets between domestic households, businesses, and governments and residents of the rest of the world during a specific time period. • current account The sum of net exports (exports minus imports) plus net income received from abroad plus net transfers from abroad. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 13 of 28 19.3 THE CURRENT ACCOUNT, THE FINANCIAL ACCOUNT, AND THE CAPITAL ACCOUNT Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance • financial account The value of a country’s net sales (sales minus purchases) of assets. • capital account The value of capital transfer and transaction in nonproduced, nonfinancial assets in the international accounts. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 14 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.3 THE CURRENT ACCOUNT, THE FINANCIAL ACCOUNT, AND THE CAPITAL ACCOUNT Rules for Calculating the Current, Financial, and Capital Accounts Here is a simple rule for understanding transactions on the current, financial, and capital accounts: Any action that gives rise to a demand for foreign currency is a deficit item. Any action that gives rise to a supply of foreign currency is a surplus item. The current, financial, and capital accounts of a country are linked by a very important relationship: current account + financial account + capital account = 0 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 15 of 28 19.3 THE CURRENT ACCOUNT, THE FINANCIAL ACCOUNT, AND THE CAPITAL ACCOUNT Rules for Calculating the Current, Financial, and Capital Accounts Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 16 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.3 THE CURRENT ACCOUNT, THE FINANCIAL ACCOUNT, AND THE CAPITAL ACCOUNT Rules for Calculating the Current, Financial, and Capital Accounts • net international investment position Domestic holding of foreign assets minus foreign holdings of domestic assets. • sovereign investment fund Assets accumulated by foreign governments that are invested abroad. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 17 of 28 2 WORLD SAVINGS AND U.S. CURRENT ACCOUNT DEFICITS APPLYING THE CONCEPTS #2: What factors may allow the United States to continue running large trade deficits with the rest of the world? Macroeconomics: Principles, Applications, and Tools 6/e. APPLICATION O’Sullivan, Sheffrin, Perez C H A P T E R 19 The World of International Finance The 2006 Economic Report of the President directly addressed whether the United States can continue to run large current account deficits and, of course, financial account surpluses. In the report, the government recognized that the current account deficits would eventually be reduced. However, it also highlighted a number of factors suggesting the deficits could continue for a long period of time. For the United States to continue to run a current account deficit, other countries in the world need to continue to purchase U.S. assets. In recent years, four major countries experienced circumstances that encouraged them to save by purchasing assets from abroad: Japan, Germany, Russia, and China. For the United States to continue to run trade deficits in the future, these or other countries must want to continue to save more than they want to invest domestically. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 18 of 28 19.4 FIXED AND FLEXIBLE EXCHANGE RATES Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance To set the stage for understanding exchange rate systems, let’s recall what happens when a country’s exchange rate appreciates—increases in value. There are two distinct effects: 1 The increased value of the exchange rate makes imports less expensive for the residents of the country where the exchange rate appreciated. 2 The increased value of the exchange rate makes U.S. goods more expensive on world markets. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 19 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.4 FIXED AND FLEXIBLE EXCHANGE RATES Fixing the Exchange Rate • foreign exchange market intervention The purchase or sale of currencies by government to influence the market exchange rate. FIGURE 19.5 Government Intervention to Raise the Price of the Dollar To increase the price of dollars, the U.S. government sells euros in exchange for dollars. This shifts the demand curve for dollars to the right. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 20 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.4 FIXED AND FLEXIBLE EXCHANGE RATES Fixed versus Flexible Exchange Rates FLEXIBLE EXCHANGE RATE SYSTEM • flexible exchange rate system A currency system in which exchange rates are determined by free markets. FIXED EXCHANGE RATES • fixed exchange rate system A system in which governments peg exchange rates to prevent their currencies from fluctuating. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 21 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.4 FIXED AND FLEXIBLE EXCHANGE RATES Fixed versus Flexible Exchange Rates BALANCE OF PAYMENTS DEFICITS AND SURPLUSES • balance of payments deficit Under a fixed exchange rate system, a situation in which the supply of a country’s currency exceeds the demand for the currency at the current exchange rate. • balance of payments surplus Under a fixed exchange rate system, a situation in which the demand of a country’s currency exceeds the supply for the currency at the current exchange rate. • devaluation A decrease in the exchange rate to which a currency is pegged under a fixed exchange rate system. • revaluation An increase in the exchange rate to which a currency is pegged under a fixed exchange rate system. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 22 of 28 Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. C H A P T E R 19 The World of International Finance 19.4 FIXED AND FLEXIBLE EXCHANGE RATES The U.S. Experience with Fixed and Flexible Exchange Rates Fixed exchange rate systems provide benefits, but they require countries to maintain similar economic policies—especially to maintain similar inflation rates and interest rates. Higher prices in the United States cause the U.S. real exchange rate to rise. This increase in the real exchange rate over time causes a trade deficit to emerge. Exchange Rate Systems Today The flexible exchange rate system has worked well enough since the breakdown of Bretton Woods. Some economists believe that the world will eventually settle into three large currency blocs: the euro, the dollar, and the yen. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 23 of 28