Balance of Payments Exchange Rates International Economics Balance
Balance of Payments & Exchange Rates International Economics
Balance of Payments • The BOP is an accounting of a country's international transactions for a particular time period • Any transaction that causes money to flow into a country is a credit • Any transaction that causes money to flow out is a debit • 2 subaccounts • Current account • Financial account • Balance of payments must equal $0
Current Account • Balance on goods and services • Exports are a credit (+) • Imports are a debit (-) • Negative balance of trade means a trade deficit occurred • Net investment income • Interest and dividend payments • Net transfers • Foreign aid, money sent to relatives of immigrants
Financial Account • Foreign purchases of assets in the U. S. (+) • U. S. purchases of assets abroad (-) • Financial Assets • Stocks, bonds, foreign currencies, etc. • Foreign Direct Investment • Direct investment into production or business in a country by a company in another country • Buying a company in the target country • Expanding operations of an existing business in that country
Supply of and Demand for Dollars The supply of U. S. dollars is determined by U. S. demand foreign goods, services and investments. Demand for U. S. dollars is determined by foreign demand for U. S. goods, services and investments.
Flexible Exchange Rates • Determinants • Changes in tastes • Change in relative incomes • Change in relative prices • Change in relative real interest rates • Speculation
Monetary and Fiscal Policies Affect Exchange Rates • Changes in relative real interest rates are created by these policies • Changes in the international value of the dollar affect imports and exports • Changes in NX affect AD
- Slides: 7