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U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency 21 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 Previous Slide End Show Next Slide EXCHANGE RATES, THE BALANCE OF PAYMENTS, AND TRADE DEFICITS Copyright McGraw-Hill/Irwin, 2002 U.S. EXPORT TRANSACTION Assume $2 = £1 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 Previous Slide End Show Next Slide $300,000 in American computers purchased by a British buyer for £150,000 £150,000 check drawn on British bank to pay for computers £150,000 check is exchanged for $300,000 at a New York bank New York bank sends £150,000 check to London bank for future sale to buyers who need pounds Copyright McGraw-Hill/Irwin, 2002 U.S. IMPORT TRANSACTION Assume $2 = £1 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 Previous Slide End Show Next Slide £150,000 in British compact discs purchased by a U.S. buyer for $300,000 £150,000 check purchased from U.S. bank to pay for CDs for $300,000 £150,000 check is exchanged for CD purchase from supplier CD firm deposits £150,000 check to British bank Copyright McGraw-Hill/Irwin, 2002 U.S. IMPORT TRANSACTION Points to remember: 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 American exports create a foreign demand for dollars which creates a supply of foreign currencies which are available to American buyers... International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms Previous Slide Next Slide Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply. End Show Copyright McGraw-Hill/Irwin, 2002 BALANCE OF PAYMENTS 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 Previous Slide End Show Next Slide Current Account Trade Deficits & Surpluses Balance on Goods & Services Balance on Current Account Capital Account Balance on Capital Account Official Reserves Balance of Payment Deficits & Surpluses Copyright McGraw-Hill/Irwin, 2002 GLOBAL PERSPECTIVE U.S. Export Transaction U.S. Trade Balances in Goods, Selected Nations, 1999 U.S. Import Transaction Balance of Payments -80 -70 -60 -50 -40 -30 The Market for Currency Determinants of Exchange Rates Recent U.S. Trade Deficits Key Terms Previous Slide 0 10 Canada Fixed Exchange Rates International Exchange Rate Systems -10 Australia Brazil Flexible Exchange Rates Exchange Controls and Rationing -20 China Germany Japan Mexico Netherlands Next Slide End Show Source: Department of Commerce Copyright McGraw-Hill/Irwin, 2002 Flexible Exchange Rates U.S. Export Transaction Flexible or Floating- U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Exchange-Rate System Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Fixed Exchange-Rate System Recent U.S. Trade Deficits Key Terms Previous Slide Depreciation & Appreciation Next Slide End Show Copyright McGraw-Hill/Irwin, 2002 THE MARKET FOR CURRENCY 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 Previous Slide Dollar price of one pound P EXCHANGE RATE: $2 = £1 S 3 2 Dollar depreciates Dollar appreciates 1 D Next Slide End Show Quantity of pounds Copyright McGraw-Hill/Irwin, 2002 Q DETERMINANTS OF 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 Recent U.S. Trade Deficits Key Terms Previous Slide End Show Next Slide Changes in Tastes Relative Income Changes Relative Price Changes Purchasing Power Parity Theory Relative Interest Rates Speculation Flexible exchange rates automatically adjust to eliminate balance of payments deficits or surpluses. Copyright McGraw-Hill/Irwin, 2002 DISADVANTAGES OF FLEXIBLE EXCHANGE RATES U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Uncertainty and Diminished Trade Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Terms of Trade Changes Recent U.S. Trade Deficits Key Terms Previous Slide Next Slide Instability End Show Copyright McGraw-Hill/Irwin, 2002 FIXED EXCHANGE RATES U.S. Export Transaction U.S. Import Transaction Balance of Payments Fixed Exchange Rates 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 Previous Slide Next Slide End Show Copyright McGraw-Hill/Irwin, 2002 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 Previous Slide End Show Next Slide •Distorted Trade •Favoritism •Restricted Choice •Black Markets Domestic Macro Adjustments Copyright McGraw-Hill/Irwin, 2002 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 Previous Slide End Show Next Slide 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-7 (G-8) Interventions Copyright McGraw-Hill/Irwin, 2002 RECENT U.S. TRADE DEFICITS U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Causes of the Trade Deficits •American Economic Growth •Declining U.S. Savings Rates Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms Previous Slide End Show Next Slide Implications of U.S. Trade Deficits • Increased Current Consumption • Increased U.S. Indebtedness Copyright McGraw-Hill/Irwin, 2002 balance of payments current account balance on goods & services trade deficit trade surplus balance on current account capital account balance on capital account official reserves balance of payment deficits & surpluses flexible-or-floating- exchangerate system Copyright McGraw-Hill/Irwin 2002 fixed exchange-rate system purchasing power-parity theory currency interventions exchange controls gold standard devaluation Bretton Woods system International Monetary Fund (IMF) managed floating exchange rates BACK END