Download McB_Foreign Exchange and Trade Deficiits

Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
36
Exchange Rates, the
Balance of Payments,
and Trade Deficits
End Show
36-1
Copyright 2008 The McGraw-Hill Companies
Chapter Objectives
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-2
• 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
Copyright 2008 The McGraw-Hill Companies
Financing International Trade
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-3
• U.S. Export Transactions
– Importer must pay in their currency which
is exchanged by the US for dollars
– US exports create a foreign demand for
dollars & increases the US supply of
foreign currency
• U.S. Import Transactions
– US must pay in US dollars which is
exchanged by the importer for their
currency.
– US importing of product creates demand
for foreign currency and decreases the
supply of foreign currency held in the US.
Copyright 2008 The McGraw-Hill Companies
Balance of Payments- sum of
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
all transactions that take place
between it’s residents and
residents of foreign nations.
The Current Account
– Record of nations exports and
imports of:
• goods and services (Product, travel,
insurance)
• Net investment income(US earnings on
investments abroad minus foreign
investment earnings in US)
• Net transfers (foreign aid, pensions
paid to US citizens living abroad)
Key Terms
End Show
36-4
Copyright 2008 The McGraw-Hill Companies
Financing International Trade
GLOBAL PERSPECTIVE
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
U.S. Trade Balances in Goods and Services
Select Nations, 2008
Good and Services Deficit
Goods and Services Surplus
+6.8
Australia
Belgium
+4.4
Canada -66.5
China
Germany -45.8
Key Terms
Japan
-75.6
Mexico
-45.1
Netherlands
End Show
-162
-160
-70 -60 -50 -40 -30 -20 -10
+11.8
10 20
Source: BEA
36-5
Copyright 2008 The McGraw-Hill Companies
• Capital/Financial Account
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-6
– Flows of money from the purchase of a
Real or Financial Asset domestically or
abroad.
– Real Asset: AB sold to Inbev
– Financial Asset: Shares of Inbev sold to
American investors.
• Official (Reserve) Account-is the
offsetting account the government
controls.
– Country uses foreign assets or currency
to offset a balance of payments deficit
(Credit-positive)
– Balance of payment surpluses are earned
foreign currency (Debit-negative)
Copyright 2008 The McGraw-Hill Companies
Balance of Payments
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-7
• Classifying transactions
– Loss of foreign currency
– Gain of foreign currency
• If the international transaction
uses foreign currency to
complete the transaction it is a
Debit(negative)
• If the international transaction
earns foreign currency to
complete the transaction it is a
Credit (positive)
Copyright 2008 The McGraw-Hill Companies
Flexible Exchange Rates
• Flexible or Floating Exchange
Rates
• Fixed Exchange Rate system
• Depreciation and Appreciation
• Determinants of Exchange
Rates
G36.1
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
– Changes in Tastes
– Relative Income Changes
– Relative Price-Level Changes
• Purchasing-Power-Parity Theory
– Relative Interest Rates
– Speculation
Key Terms
End Show
36-8
Copyright 2008 The McGraw-Hill Companies
Flexible Exchange Rates
The Market for Foreign Currency (Pounds)
P
Sl
Dollar Price of 1 Pound
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
$3
$2
Dollar
Depreciates
(Pound
Appreciates)
Exchange
Rate: $2 = £1
Dollar
Appreciates
(Pound
Depreciates)
$1
Dl
0
Key Terms
Ql
Quantity of Pounds
End Show
36-9
Copyright 2008 The McGraw-Hill Companies
Q
Flexible Exchange Rates
The Market for Foreign Currency (Pounds)
P
Sl
Dollar Price of 1 Pound
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
c
$3
$2
$1
a
x
Exchange
Rate:
$3 = £1
Balance
Of Payments
Deficit
b D
2
Exchange
Rate:
$2 = £1
Dl
0
Key Terms
Ql
Quantity of Pounds
End Show
36-10
Copyright 2008 The McGraw-Hill Companies
Q2
Q
Flexible Exchange Rates
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-11
• Flexible Rates and the
Balance of Payments
• Disadvantages of
Flexible Exchange Rates
• Uncertainty and
Diminished Trade
• Terms-of-Trade Changes
• Instability
Copyright 2008 The McGraw-Hill Companies
Fixed Exchange Rates
• Use of Reserves
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
– Currency Interventions
• Trade Policies
• Exchange Controls and
Rationing
– Distorted Trade
– Favoritism
– Restricted Choice
– Black Markets
• Domestic Macroeconomic
Adjustments
Key Terms
End Show
36-12
Copyright 2008 The McGraw-Hill Companies
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
International Exchange-Rate
Systems
• The Gold Standard: Fixed
Exchange Rates
–Devaluation
–Gold Flows
–Domestic Macroeconomic
Adjustments
–Collapse of the Gold
Standard
End Show
36-13
Copyright 2008 The McGraw-Hill Companies
International Exchange-Rate
Systems
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-14
• 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
Copyright 2008 The McGraw-Hill Companies
International Exchange-Rate
Systems
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-15
• The Current System:
The Managed Float
–Managed Floating
Exchange Rates
• In Support of the
Managed Float
• Concerns With the
Managed Float
Copyright 2008 The McGraw-Hill Companies
Recent U.S. Trade Deficits
Financing
International
Trade
Capital and
Financial
Account
Flexible
Exchange
Rates
Fixed Exchange
Rates
International
ExchangeRates System
Recent U.S.
Trade Deficits
Last Word
Key Terms
End Show
36-16
• Causes of Trade
Deficits
• Implications of U.S.
Trade Deficits
–Increased Current
Consumption
–Increased U.S.
Indebtedness
Copyright 2008 The McGraw-Hill Companies