Post on 27-Dec-2015
Macroeconomics – Unit 6
An open economy (as opposed to a _________ economy) interacts with the rest of the world through...
Goods market
Financial markets
(1)
(2)
closed
The exchange rate for a currency impacts a country’s exports.
If the British pound depreciates relative to the US dollar, will people want to buy more Cadbury’s chocolate or Hershey’s chocolate?
If real interest rates are higher in Mexico than in the USA, will investors want to buy bonds from Mexico or from the USA?
If the Japanese yen appreciates relative to the US dollar what will happen to the exports of US beef?
To buy something from a country you must pay in that country’s currency.
A. The Balance of Payments records all these types of international transactions.
If the transaction required us to purchase & spend foreign currency to complete the transaction it is recorded as a debit
Money flows out of the country.6 of 21
Balance of Payments
If the transaction required others to purchase our currency to complete the transaction, it is recorded as a credit.
Money flows into the country.
The Balance of Payments includes 2 main sub divisions…
Current Account
Capital Account
Tracks flows of
1- financial assets
2- real assets
Tracks flows of goods & services
In Theory the current account must “balance” with the Capital Account and the Financial Account
Current Account
Capital Account
=
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Exports – domestically produced goods & services that are sold abroad
Imports – foreign produced goods & services that are sold domestically
Net exports = exports – imports
also called our trade balance
B. goods & services
Net exports = exports – imports
also called our trade balance
______ ______ - when country sells more abroad than it buys
______ ______ - sells fewer goods & services abroad than it buys
trade surplus
trade deficit
Net capital outflow =
If US citizen buys stock in British Petroleum Corp., net capital outflow will ___________
increase
C. financial markets
purchase of foreign assets by domestic residents minus
purchase of domestic assets by foreigners
Net capital outflow
financial markets
If a Mexican citizen buys stock in KFC., net capital outflow will _________.decrease
When net capital outflow is negative, then domestic residents are buying _________ foreign assets than foreigners are buying domestic.
fewer
Capital is said to be “flowing into” the country.
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When net capital outflow is positive then domestic residents are buying _________ foreign assets than foreigners are buying domestic.
more
Capital is said to be “flowing out” of the country.
Nominal exchange rate -- rate at which a person can trade the currency of one country for he currency of another
most countries have free floating exchange rates which are determined by an interaction of supply & demand
D. exchange rates
S
D
Q of US $
Br.
Po
un
d /
US
$
Ex
cha
ng
e R
ate
US $
appreciation – an increase in the value of a currency as measured by the amount of a foreign currency it can buy
depreciation – a decrease in the value of a currency as measured by the amount of foreign currency it can buy
1994 1.00 .91
2004 1.00 .75
2008 1.00 .63
It’s Easter and Americans want to buy Cadbury’s crème eggs.
S
D
Q of Br. Pounds
US
$ /
Br.
Po
un
d
Ex
cha
ng
e R
ate
S
D
Q of US $
Br.
Po
un
d /
US
$
Ex
cha
ng
e R
ate
What happens to the value of the pound? Value of the US dollar?
Americans must supply their dollars & demand US pounds.
S1
D1
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Let’s say interest rates are higher in the USA than in Mexico. Where will investors from Mexico want to invest?
S
D
Q of Mex. Pesos
US
$ /
Me
x. p
eso
E
xch
an
ge
Ra
teS
D
Q of US $
Me
x. P
es
o /
US
$
Ex
cha
ng
e R
ate
What happens to the value of the peso? Value of the US dollar?
S1
D1
Spain is the new hot travel destination among Mexicans.
S
D
Q of Mex. Pesos
US
$ /
Me
x. p
eso
E
xch
an
ge
Ra
teS
D
Q of Euros
Me
x. P
es
o /
Eu
ro
Ex
cha
ng
e R
ate
What happens to the value of the peso? Value of the Euro?
S1
D1
American kids go nuts for the newest video games out of Japan.
S
D
Q of yen
US
$ /
ye
n
Ex
cha
ng
e R
ate
S
D
Q of US $
yen
/ U
S $
E
xch
an
ge
Ra
te
What happens to the value of the yen? Value of the US dollar?
S1
D1
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