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
Currency War of 2009–11 wikipedia , lookup
Currency war wikipedia , lookup
Bretton Woods system wikipedia , lookup
International status and usage of the euro wikipedia , lookup
Reserve currency wikipedia , lookup
International monetary systems wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Foreign exchange market wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Basics of International Finance National income accounting Records all the expenditures that contribute to a country’s income and output Balance of payments accounting Helps us keep track of both changes in a country’s indebtedness to foreigners and the fortunes of its export- and import-competing industries Gross national product (GNP) The value of all final goods and services produced by a country’s factors of production and sold on the market in a given time period. It is the basic measure of a country’s output. 5/23/2017 Econ 355, Nisha Malhotra 1 The National Income Identity for an Open Economy It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production: Y = C + I + G + EX – IM (12-1) where: Y is GNP C: The amount consumed by private domestic residents I : The amount put aside by private firms to build new plant and equipment for future production 5/23/2017 G is government purchases EX is exports IM is imports In a closed economy, EX = IM = 0. Econ 355, Nisha Malhotra 2 The Current Account and Foreign Indebtedness Current account (CA) balance The difference between exports of goods and services and imports of goods and services (CA = EX – IM) A country has a CA surplus when its CA > 0. A country has a CA deficit when its CA < 0. CA measures the size and direction of international borrowing. A country’s current account balance equals the change in its net foreign wealth. Example: Canada imports 20 bushels of wheat and exports only 10 bushels of wheat. The current account deficit of 10 bushels is the value of Canada’s borrowing from foreigners, which the country will have to repay in the future. 5/23/2017 Econ 355, Nisha Malhotra 3 The Balance of Payments Accounts (BOP) Three types of international transactions are recorded in the balance of payments: Exports or imports of goods or services Purchases or sales of financial assets 5/23/2017 Money, Stocks, government debt and purchase/sale of factories Transfers of wealth between countries They are recorded in the capital account. Econ 355, Nisha Malhotra 4 Double-entry book keeping-BOP Each transaction enters the BOP twice, once as a credit and once as a debit Example: A U.S. citizen pays $200 for dinner at a French restaurant in France by charging his Visa credit card. That is, the U.S. trades assets for services. This transaction creates the following two offsetting entries in the U.S. balance of payments: 5/23/2017 It enters the U.S. CA with a negative sign (-$200). It shows up as a $200 credit in the U.S. financial account. Econ 355, Nisha Malhotra 5 Double-entry book keeping-BOP 2003 Class of Econ 355 is so generous that it gives $5000 in foreign aid to Nisha in India. 5/23/2017 This transaction creates the following two offsetting entries It enters the Canadian capital account with a negative sign (-$5000). It shows up as a $5000 credit in the Canadian financial account. Econ 355, Nisha Malhotra 6 The Fundamental BOP Identity Any international transaction automatically gives rise to two offsetting entries in the balance of payments resulting in a fundamental identity: Current account + financial account + capital account = 0 ************************************************************************** Capital Inflow and Outflow Financial inflow also called -(capital inflow) Financial outflow also called - (capital outflow) 5/23/2017 A loan from the foreigners with a promise that they will be repaid A transaction involving the purchase of an asset from foreigners Econ 355, Nisha Malhotra 7 Official Reserve Transactions Central bank-US/ (Bank of Canada) Official international reserves Foreign assets held by central banks as a cushion against national economic misfortune Official foreign exchange intervention 5/23/2017 The institution responsible for managing the supply of money Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies. Econ 355, Nisha Malhotra 8 The Exchange Rate THE EXCHANGE RATE refers to the value of the Canadian dollar against the currencies of other countries. Depreciation: When the value (purchasing power) of the Canadian dollar falls. (Moving from 1.3 per US dollar to 1.5 per US dollar) (.77 per CA dollar to .67 per CA dollar) imported goods become more expensive, and we tend to reduce the volume of our imports. At the same time, other countries will pay less for some of our products and that will tend to boost export sales. A Depreciation lowers the relative price of export and increases the relative price of imports. Appreciation: The opposite 5/23/2017 Econ 355, Nisha Malhotra 9 Using the exchange rate to calculate the price for Canon Canon Powershot SD100 3.2 Megapixel 2x Optical/3.2x Digital Zoom Digital Camera www.tigredirect.com PRICE: US $329.99 5% tax & free shipping=346.49 www.tigerdirect.ca PRICE: CA $445.99 14.5% tax & free shipping=510.55 5/23/2017 Buying the camera in the US-price in Canadian dollars (US $) * (CA $/US $) us$346.49 * 1.32= ca $457.37 Econ 355, Nisha Malhotra 10 The Foreign Exchange market Exchange rates are determined by the interaction of buyers and sellers of foreign currencies in the foreign exchange market. Commercial Banks, Corporations, Nonbank financial institutions and Central banks. Demand for deposit in a currency depends on the expected rate of return for this asset. Choosing to hold Euro or Dollar deposit- Need to know-how the money value of the deposit will change and how the exchange rate will change Money value depend on the currency’s interest rate Change in exchange rate- rate of depreciation of the currency 5/23/2017 Econ 355, Nisha Malhotra 11 Demand for foreign currency asset The expected rate of return difference between dollar and euro deposits is: R$ - [R€ + (Ee$/ € - E$/€ )/E$/€ ]= R$ - R€ - (Ee$/€ -E$/€ )/E$/€ (13-1) where: R$ = interest rate on one-year dollar deposits R€ = today’s interest rate on one-year euro deposits E$/€ = today’s dollar/euro exchange rate (number of dollars per euro) Ee$/€ = dollar/euro exchange rate (number of dollars per euro) expected to prevail a year from today 5/23/2017 Econ 355, Nisha Malhotra 12 Determination of the Equilibrium Dollar/Euro Exchange Rate Interest Parity: The Basic Equilibrium Condition The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. R$= R€ + (Ee$/€ -E$/€ )/E$/€ 5/23/2017 Econ 355, Nisha Malhotra 13 Equilibrium in the Foreign Exchange Market Determination of the Equilibrium Dollar/Euro Exchange Rate Exchange rate, E$/€ E2$/€ E1$/€ E3 Return on dollar deposits 2 1 3 $/€ Expected return on euro deposits R$ 5/23/2017 Econ 355, Nisha Malhotra Rates of return (in dollar terms) 14 Relationships Interest rates & Current Exchange Rate An increase in the interest paid on deposits of a currency causes that currency to appreciate against foreign currencies Exchange rate, E$/€ E1$/€ Dollar return 1 E2$/€ 1' 2 Expected euro return R1$ 5/23/2017 R2$ Econ 355, Nisha Malhotra Rates of return (in dollar terms) 15 Relationships Expectations about the future exchange rate & Current Exchange Rate A rise in the expected future exchange rate causes a rise in the current exchange rate. Exchange rate, E$/€ Dollar return Rise in the future Exchange rate E2$/€ 2 E1$/€ 1 Expected euro return R$ 5/23/2017 Econ 355, Nisha Malhotra Rates of return (in dollar terms) 16 Relationships Money supply and the exchange rate in the short run Money supply & interest rate--Increase in the level of the nominal money supply lowers the interest rate Since people are holding more money than they desire, they bid for assets that pay interest. The economy as a whole cannot reduce its money holdings, so interest rates are driven down as unwilling money holders compete to lend their excess cash balance. Interest rate & exchange rate (interest parity condition)-decrease in dollar interest rate depreciates the currency Thus, an in crease in a country’s money supply causes its currency to depreciate in the foreign exchange market. Long Run-Price level increases and no change in the interest rate and output. It does lead to a permanent depreciation in the currency. 5/23/2017 Econ 355, Nisha Malhotra 17 Relationships Money supply and the exchange rate Money-Market/Exchange Rate Linkages Europe European System of Central Banks Canada Bank of Canada MSCA (Canada money supply) MS E Canada money market R$ (Dollar interest rate) (European money supply) European money market Foreign exchange market R€ (Euro interest rate) E$/€ (Dollar/Euro exchange rate) 5/23/2017 Econ 355, Nisha Malhotra 18