Balance of Trade vs Balance of Payments
Includes only goods and services
Net Exports = exports imports
Trade surplus = exporting more than imported
Trade deficit = exporting less than is imported
O
We have this with China because we import a lot more than we export to them
Balance of Payments
Considers all international transactions
Summary of a country's international trade
O Is within a given year prepared in the domestic country's currency
Made up of two accounts → the current account and financial account
Current Account is made up of three parts:
→ Trades in goods and services (net exports)
Difference between nation's exports and imports
→ Investment income - income from factors of production including payments made to
foreign
Money earned by Japanese cars produced in the U.S.
→ Net Transfers - money flows form private or public sectors
Donations, aids and grants
Financial Account
→ Measures purchase of sales of financial assets abroad
→ Purchases of things that continue to earn money
Example: a Korean company buys a factory in Ohio
An American buys a Japanese government bond
When a foreign company buys business in a different country that is Foreign
Direct Investment
→ Net Capital Outflow-the difference between the purchase of foreign assets and domestic
assets purchased by foreigners
→ Financial account surplus = inflow>outflow
More foreign money coming in
→ Financial account deficit = inflow <outflow
Less foreign money coming in and more U.S. money going out
Practice
- If U.S. income increases relative to other countries, the balance of payments moves
toward a surplus - If the U.S. dollar depreciates relative to other countries, the balance of payments
moves toward a surplus
- U.S. exports become more desirable
- America exports more
Exports and Imports
a. U.S. citizens have more disposable income
b. Americans import more
c. Net exports decrease
d. The current account balance decreases and moves towards a deficit
c. Net exports increase
d. Current account balance increases and moves towards a surplus
Exchange Rates
U.S. sells cars to Mexico
Price of one currency relative to another currency
Silver per gold, silver price in gold, value of a gold in silver
If 1 gold used to equal 4 silver
O But then 1 gold is now worth 10 silver
O
It appreciated
O More valuable
Appreciation and depreciation have to do with the change in exchange rate, not the
current exchange rate
What happens if you need more dollars to buy one euro
O
The U.S. dollar depreciated
O
The euro appreciated
What happens if you need less dollars to buy one euro
O U.S. dollar appreciates relative to euro
Appreciation- increase of value of a country's currency with respect to a foreign currency
There are different national currencies
Each country must be paid in their own currency
Buyer must exchange their currency for that of the sellers
FOREX Supply and Demand Simplified
If you demand one currency, you must supply your currency
Forex Shifters
Changes in Taste
British tourists flock to the U.S.
Demand for U.S. dollar increases (shifts right)
Supply of British pounds increases (shifts right)
Pound depreciates
Dollar appreciates
Changes in Relative Incomes (Resulting in more imports)
U.S. growth increases US incomes…
US buys more imports
US demand for pound increases
Supply of US dollar increases
Pound appreciates
Dollar depreciates
Changes in Relative Price Level (Resulting in more imports)
U.S. prices increase relative to Britain
U.S. demand for cheaper imports increases
U.S. demand for pounds increases
Supply of U.S. dollars increases
Pound appreciates
Dollar depreciates
Changs in relative Interest Rates
U.S. has a higher interest rate than Britain
British people want to put money in U.S. banks
Capital flow increase toward the US
British demand for US dollar increases…
British supply more pounds
Pound depreciates
Dollar appreciates
What will happen to the international value of the Mexican Peso if there is a high inflation in Mexico?
Demand for pesos will decrease since Mexico's trading partners will not want to
purchase higher priced Mexican products
The supply will increase as Mexican look to buy lower
What will happen to the international value of the Mexican Peso if the interest rate in Mexico
falls?
Supply will increase
The demand for pesos will decrease
An appreciation of the U.S. dollar on the foreign exchange market could be caused by a decrease in…
U.S. CPI
Because price level decreases and the demand for USD to increase
If the real interest rate in the United States increases relative to that of the rest of the world,
capital should flow
Into the United States and the dollar will appreciate
What will cause the U.S. dollar to depreciate relative to the euro?
An increase in household income in the USA
