Download Balance of payments

Chapter 12
International Linkages
Introduction
•
National economies are becoming more closely
interrelated
•
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Economic influences from abroad have effects on the U.S.
economy
Economic developments and policies in the U.S. affect
economies abroad
When the U.S. moves into a recession, it tends to pull down other
economies
 When the U.S. is in an expansion, it tends to stimulate other
economies

•
In this chapter we present the key linkages among open
economies and introduce some first pieces of analysis
12-2
Introduction
Economies are linked through two broad channels
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Trade in goods and services
1.
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Some of a country’s production is exported to foreign countries
 increase demand for domestically produced goods
Some goods that are consumed or invested at home are produced
abroad and imported
 a leakage from the circular flow of income
Finance
2.
•
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U.S. residents can hold U.S. assets OR assets in foreign countries
As international investors shift their assets around the world, they
link assets markets here and abroad  affect income, exchange
rates, and the ability of monetary policy to affect interest rates
12-3
The Balance of Payments and Exchange Rates
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Balance of payments: the
record of the transactions of
the residents of a country with
the rest of the world
Two main accounts:


[Insert Table 12-1 here]
Current account: records trade in
goods and services, as well as
transfer payments
Capital account: records
purchases and sales of assets, such
as stocks, bonds, and land
Current account + Capital account =
Balance of Payments
12-4
Exchange Rates
•
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Exchange rate is the price of one currency in terms of
another
Two different exchange rate systems:
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Fixed exchange rate system
Floating exchange rate system
12-5
Fixed Exchange Rates
•
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The central bank stands ready to buy and sell its currency
at a fixed price
Central banks hold reserves to sell when have to intervene
in the foreign exchange market
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Intervention: CB buys or sells foreign exchange
If a country persistently runs deficits in the balance of
payments:
•
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CB eventually will run out of reserves on of foreign exchange
Before this occurs, CB will likely devalue the currency
12-6
Flexible Exchange Rates
•
The central bank allows the exchange rate to adjust to
equate the supply and demand for its currency
12-7