Download current account

International Trade
and Exchange Rates
Outline
•Balance of payments (BOP) accounting
•How open is the U.S. economy?
•Description of international trade
•Exchange rates—how are they determined?
•Exchange rates and the price of imported and
exported goods.
Balance of payments accounting
BOP accounting is the recording of transactions between
domestic and foreign economic agents.
Any transaction that results in a receipt of money by
domestic agents from abroad is recorded as a credit in the
BOP accounts.
Any transaction that entails the payment of money by
domestic units to foreigners is recorded as a debit in the
BOP accounts.
The current account records foreign transactions
involving merchandise and services.
The capital account records foreign transactions
involving financial assets and land.
Current Account (in billions)
1. Merchandise exports
+671.0
2. Merchandise imports
-919.0
3. Trade balance (1 + 2)
-248.0
4. Service exports
+503.0
5. Service imports
-446.6
6. Goods and services balance (3 + 4 + 5)
-191.6
7. Net unilateral transfers
-41.9
8. Current account balance (6 + 7)
-233.5
Source: Department of Commerce
Capital Account (in billions)
9. Outflow of U.S. capital
-297.8
10. Inflow of foreign capital
+564.6
11. Capital account balance ( 9 + 10)
+266.8
12.Net change in U.S. official assets abroad
TOTAL (8 + 11 + 12)
Source: Department of Commerce
-33.3
0.0
An index of openness
Let
•O denote the index of openness
•X is exports
•M is imports
•GDP is gross domestic product
Thus, we have:
X M

 100
GDP
This is a
simple
measure of
the relative
importance
of the foreign
sector
Imports + Exports as a Percent of U.S. GDP, 1969-2000
28
percent
24
20
16
12
8
70
75
80
85
90
95
00
Imports and Exports of the U.S., April to July, 1999
billions of current dollars
110
105
104
103
100
99
95
97
90
85
80
75
78
78
79
79
Exports
Imports
70
Apr-99
May -99
Jun-99
Mon th
Source: Dism al Scientist (www.dismal.com)
Jul-99
95
90
Exports
Imports
85
80
75
70
Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98
The U.S. trade deficit
ballooned to $271.31
billion in 1999—a $107
billion increase from 1998.
In billions of current dollars
20
0
-20
-40
-60
-80
-100
-120
70
75
80
85
90
95
U.S. Current Account Balance
00
U.S. Trade in G oods (Exports), 1996
billio ns of do llars
Other
94.5 / 15.4%
Agric ultural prod.
61.5 / 10.0%
Capital goods
Industrial supplies
65.0 / 10.6%
137. 9 / 22.5%
Automotive
253. 1 / 41.4%
Source: Ec onomic Report of the President
U.S. Trade in G oods (Imports), 1996
billio ns of do llars
Petroleum
72.70 / 9.1%
Other
235.80 / 29.4%
Industrial supplies
136.80 / 17.0%
Automotive
Capital goods
128.90 / 16.0%
Source: Ec onomic Report of the President
229.00 / 28.5%
Current Account balance of selected industrialized nations,
August 1998 to August 1999
Australia
Britain
Canada
Current Account
(billions of U.S.
dollars)
-8.1
-38.9
16.2
France
Germany
Japan
Netherlands
23.1
72.8
122.9
14.2
Sweden
U.S.
16.8
-276.7
Country
Source: The Economist
Top Exporters in 1999
Nation
Exports as
percent of
World Total
United States
12.4
Germany
9.6
Japan
7.5
France
5.3
Britain
4.8
Canada
4.2
Italy
4.1
Netherlands
3.6
Hong Kong
3.5
China
3.3
Source: The Economist
An exchange rate is the price
of one national currency
expressed in terms of another national
currency. For example, the dollar
price of the British pound is $1.71-meaning it takes $1.71 to buy 1 pound
Why do agents
want to swap
marks for
dollars?
Exchange rates
are determined by
the supply and demand of
foreign exchange
DM per $
•To buy
American-made
goods.
•To hold stocks
in U.S.
companies or
other dollardenominated
assets.
S
1.82
1.69
In this case, the
mark
depreciates
against the dollar
•To speculate on
D’ future exchange
rate movements
D
0
$’s
Source: Wall Street Journal
Currency Cross Rates New York Trading, August1, 2000
France
Dolla Yen D-Mark Franc
r
7.16 .065 3.35
...
Germany 2.13
6.56
...
.298
1.96
51.15
15.25
100.04
U.S.
109.2 . . .
3
. . . .009
.46
.14
.92
Euro
1.09
.511
.152
...
Japan
.019
Euro
.01
Euro in free fall
1.2
1.1
1.0
0.9
0.8
1/04/99
5/24/99
10/11/99
Dollars per Euro
2/28/00
7/17/00
Firms and individuals demand
marks to buy German- made
goods, to hold mark-denominated
financial assets, or to profit from
what they hope will be an increase
in the international value of the mark.
$ per DM
Dollar
appreciates
against the mark
S
S’
.59
.55
D
DMs
Let the dollar price of the mark = $0.59--i.e., it costs
59 cents to purchase 1 mark in the market for
foreign exchange.
Let the mark price of a Krups espresso maker = 100
marks
Question:
What is the dollar price of the Krups
espresso maker?
$ price = (.59)(100) = $59.00
Effect of an appreciating dollar on the price of
imported goods
What if the dollar should appreciate, or gain value,
against the mark?
Let the dollar price of the mark decrease to $0.55 .
Question:
What is the dollar price of the Krups
espresso maker?
$ price = (.55)(100) = $55.00
Exchange rates and the prices of
exported goods and services
Let the mark price of the dollar = 1.69 marks--i.e., its cost
1.69 marks to buy a dollar in the foreign exchange
market.
Let the dollar price of the Microsoft Windows 98 = $189.00
Question:
What is the mark price of Windows 98?
Mark price = (1.69)(189.00) = 319.41 marks
Effect of a depreciating mark on the price of
Windows 98
Let the mark price of the dollar increase to 1.82
marks.
Question:
What is the mark price of
Windows 98?
Mark price = (1.82)(189.00) = 343.98 marks