macroeconomic mcgrowhill micro ch 24 19e use this one

24
The Balance of Payments, Exchange
Rates, and Trade Deficits

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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• How Currencies of Different Nations are
Exchanged When International
Transactions Take Place
• About the Balance Sheet the United States
Uses to Account for the International
Payments it Makes and Receives
• How Exchange Rates are Determined in
Currency Markets
• The Difference Between Flexible
Exchange Rates and Fixed Exchange
Rates
• The Causes and Consequences of Recent
Record-High U.S. Trade Deficits
Copyright McGraw-Hill/Irwin, 2002


International Transactions

• International trade
–Buy/sell current goods or services
–Imports and exports
• International asset transactions
–Buy/sell real or financial assets
–Buy stock
–Sell your house to a foreigner
• Requires currency exchange
LO1

24-3


Financing International Trade
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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•

•
•
•

U.S. Export Transactions
U.S. Import Transactions
Balance of Payments
The Current Account
– Balance on Goods
– Balance on Services
– Trade Deficit
– Trade Surplus
– Balance on Current Account

Copyright McGraw-Hill/Irwin, 2002

W24.1


U.S. EXPORT TRANSACTION

Assume $2 = £1
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates

Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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$300,000 in American computers
purchased by a British buyer for
£150,000
£150,000 check drawn on British
bank to pay for computers
£150,000 check is exchanged for
$300,000 at a New York bank
New York bank sends £150,000
check to London bank for future
sale to buyers who need pounds
Copyright McGraw-Hill/Irwin, 2002


U.S. IMPORT TRANSACTION

Assume $2 = £1
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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£150,000 in British compact
discs purchased by a U.S. buyer
for $300,000
£150,000 check purchased from

U.S. bank to pay for CDs for
$300,000
£150,000 check is exchanged for
CD purchase from supplier
CD firm deposits £150,000 check
to British bank
Copyright McGraw-Hill/Irwin, 2002


U.S. IMPORT TRANSACTION

Points to remember:

U.S. Export Transaction

U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning

American exports create a foreign
demand for dollars which creates a
supply of foreign currencies which
are available to American buyers...

International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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Financing an American export
reduces the supply of foreign
currencies available and increases
the domestic money supply.
Copyright McGraw-Hill/Irwin, 2002


BALANCE OF PAYMENTS
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates

Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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Current Account
Trade Deficits & Surpluses
Balance on Goods & Services
Balance on Current Account

Capital Account
Balance on Capital Account
Official Reserves
Balance of Payment Deficits &
Surpluses
Copyright McGraw-Hill/Irwin, 2002


Balance of Payments

LO2

24-9


Official Reserves

• Foreign currencies, certain
•
•

LO2

reserves with the IMF, and stocks
of gold
Owned by government or central
bank
Used as balancing mechanism in
balance of payments
24-10


Causes of Trade Deficit
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange

Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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• U.S. Economic
growth/consumption
• Large deficit with China and
growing
• Rapidly rising oil imports and oil
prices
• A declining savings rate in the U.S.
(average propensity to consume)
Copyright McGraw-Hill/Irwin, 2002


GLOBAL PERSPECTIVE

U.S. Trade Balances in Goods,
Selected Nations, 1999

U.S. Export Transaction
U.S. Import Transaction

-80

Balance of Payments

-70

-60

-50

-40

-30

Flexible Exchange Rates

Determinants of Exchange
Rates

Canada

Fixed Exchange Rates

International Exchange R

ate Systems

China
Germany

Recent U.S. Trade Deficits

Japan

Key Terms

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-10

Australia
Brazil

The Market for Currency

Exchange Controls and Ra
tioning

-20

Mexico

Netherlands

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Copyright McGraw-Hill/Irwin, 2002

Source: Department of Commerce


Financing International Trade
GLOBAL PERSPECTIVE
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates

U.S. Trade Balances in Goods and Services
Select Nations, 2004 (compare China to ’99)
Good and Services Deficit

The Market for Currency

Goods and Services Surplus

Belgium

Fixed Exchange Rates
Exchange Controls and Ra
tioning

China

Recent U.S. Trade Deficits

-162

Germany -45.8

Key Terms

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+4.4
Canada -66.5

International Exchange R
ate Systems

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+6.8

Australia

Determinants of Exchange
Rates

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Japan

-75.6

Mexico

-45.1

+11.8

Netherlands
-160

-70 -60 -50 -40 -30 -20 -10

10 20
Source: BEA

Copyright McGraw-Hill/Irwin, 2002


U.S. Trade Balances
Goods and Services, Select Nations, 2007

U.S. Export Transaction

U.S. Import Transaction
Balance of Payments

Deficit

Flexible Exchange Rates
The Market for Currency

Belgium

Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits

+9.8
Canada

-67.0

China

-256.6

Germany -45.3

Key Terms

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+10.0

Australia

Determinants of Exchange
Rates

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Surplus

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Japan

-85.0

Mexico

-77.3
+14.3

Netherlands
-250

Copyright McGraw-Hill/Irwin, 2002

-70 -60 -50 -40 -30 -20 -10

10 20

Source: Bureau of Economic Analysis

38-14


U.S. Trade Balances
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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LO2

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Copyright McGraw-Hill/Irwin, 2002

24-15


Flexible Exchange Rates

Flexible or FloatingU.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency

Exchange-Rate System

Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning

Fixed Exchange-Rate System

International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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Depreciation & Appreciation

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Copyright McGraw-Hill/Irwin, 2002


Flexible Exchange Rates
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra

tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

•
•
•
•

Demand for pounds
Supply of pounds
Market equilibrium
Increase in dollar price of pounds
– Dollar depreciates
– Pound appreciates

• Decrease in dollar price of pound
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– Dollar appreciates
– Pound depreciates

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38-17


Flexible
Exchange
Rates
The Market for Foreign Currency (Pounds)
U.S. Export Transaction
U.S. Import Transaction

P

Sl

Balance of Payments

The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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Dollar Price of 1 Pound

Flexible Exchange Rates

$3

$2

$1

Dollar
Depreciates
(Pound
Appreciates)

Exchange
Rate: $2 = £1

Dollar
Appreciates
(Pound
Depreciates)

Dl
0

Ql

Quantity of Pounds
Copyright McGraw-Hill/Irwin, 2002

Q


•
•

LO3

Flexible Exchange Rates
Determinants of exchange rates
Factors that shift demand/supply
–Changes in tastes
–Relative income changes
–Relative price-level changes
• Purchasing-power-parity theory
–Relative interest rates
–Relative expected returns on assets
–Speculation
24-19

Flexible
Exchange
Rates
The Market for Foreign Currency (Pounds)
U.S. Export Transaction
U.S. Import Transaction

P

Sl

Balance of Payments

The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R
ate Systems
Recent U.S. Trade Deficits
Key Terms

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Dollar Price of 1 Pound

Flexible Exchange Rates

c

$3

$2

$1

a

x

Exchange
Rate:
$3 = £1

Balance
Of Payments
Deficit

b D
2

Exchange
Rate:
$2 = £1

Dl
0

Ql

Quantity of Pounds
Copyright McGraw-Hill/Irwin, 2002

Q2

Q


•
•

LO4

Flexible Exchange Rates
Eliminate balance of payments deficit or
surplus
Disadvantages of flexible exchange
rates
–Volatility
–Uncertainty and diminished trade
–Terms-of-trade changes

–Instability

24-21


Flexible Exchange Rates

LO4

24-22


•
•
•

•
LO4

Fixed Exchange Rates
Government intervention
–Use of reserves
Trade policies
Exchange controls and rationing
–Distorted trade
–Favoritism
–Restricted choice
–Black markets
Macroeconomic adjustments
24-23

Fixed Exchange Rates

• Government intervention
–Use of reserves
• Trade policies
• Exchange controls and rationing
–Distorted trade
–Favoritism
–Restricted choice
–Black markets
• Macroeconomic adjustments
LO4

24-24


Exchange Rate Systems
U.S. Export Transaction
U.S. Import Transaction
Balance of Payments
Flexible Exchange Rates
The Market for Currency
Determinants of Exchange
Rates
Fixed Exchange Rates
Exchange Controls and Ra
tioning
International Exchange R

ate Systems
Recent U.S. Trade Deficits
Key Terms

• Gold standard 1879-1934
– Fixed exchange rate system
• Bretton Woods 1944-1971
– Fixed exchange rate system indirectly
tied to gold
• Managed float 1971-present
– G-7 (G-8) Interventions

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38-25