U S Export Transaction U S Import Transaction

U. S. Export Transaction U. S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency 21 CHAPTER Determinants of Exchange Rates Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 1 Next Slide EXCHANGE RATES, THE BALANCE OF PAYMENTS, AND TRADE DEFICITS Copyright Mc. Graw-Hill/Irwin, 2002

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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 2 Next Slide 1. $300, 000 in American computers purchased by a British buyer for £ 150, 000 2. £ 150, 000 check drawn on British bank to pay for computers 3. £ 150, 000 check is exchanged for $300, 000 at a New York bank 4. New York bank sends £ 150, 000 check to London bank for future sale to buyers who need pounds Copyright Mc. Graw-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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 3 Next Slide 1. £ 150, 000 in British compact discs purchased by a U. S. buyer for $300, 000 2. £ 150, 000 check purchased from U. S. bank to pay for CDs for $300, 000 3. £ 150, 000 check is exchanged for CD purchase from supplier 4. CD firm deposits £ 150, 000 check to British bank Copyright Mc. Graw-Hill/Irwin, 2002

U. S. IMPORT TRANSACTION 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 4 Next Slide Points to remember: American exports create a foreign demand for dollars which creates a supply of foreign currencies which are available to American buyers. Financing an American export reduces the supply of foreign currencies available and increases the domestic money supply. Copyright Mc. Graw-Hill/Irwin, 2002

BALANCE OF PAYMENTS Current Account 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 5 Next Slide Balance on Goods & Services Balance on Current Account Trade Deficits & Surpluses Capital Account Balance on Capital Account Official Reserves Balance of Payment Deficits & Surpluses Copyright Mc. Graw-Hill/Irwin, 2002

GLOBAL PERSPECTIVE U. S. Export Transaction U. S. Import Transaction Balance of Payments U. S. Trade Balances in Goods, Selected Nations, 2001 -80 -70 -60 -50 -40 -30 Flexible Exchange Rates Determinants of Exchange Rates Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 6 0 10 Canada Fixed Exchange Rates International Exchange Rate Systems -10 Australia Belgium The Market for Currency Exchange Controls and Rationing -20 China Germany Japan Mexico Netherlands Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 Source: Department of Commerce 20

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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 7 Next Slide Flexible or Floating. Exchange-Rate System Fixed Exchange-Rate System Depreciation & Appreciation Copyright Mc. Graw-Hill/Irwin, 2002

THE MARKET FOR CURRENCY 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 8 Dollar price of one pound P EXCHANGE RATE: $2 = £ 1 S 3 2 Dollar depreciates Dollar appreciates 1 D Next Slide Quantity of pounds Copyright Mc. Graw-Hill/Irwin, 2002 Q

DETERMINANTS OF 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 9 Next Slide Changes in Tastes Relative Income Changes Relative Price Changes Purchasing Power Parity Theory Relative Interest Rates Speculation Flexible exchange rates automatically adjust to eliminate balance of Copyright Mc. Graw-Hill/Irwin, 2002

DISADVANTAGES OF 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 10 Next Slide Uncertainty and Diminished Trade Terms of Trade Changes Instability Copyright Mc. Graw-Hill/Irwin, 2002

FIXED 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 11 Next Slide Use of Reserves • Currency Interventions Trade Policies Copyright Mc. Graw-Hill/Irwin, 2002

EXCHANGE CONTROLS & RATIONING 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 12 Next Slide • Distorted Trade • Favoritism • Restricted Choice • Black Markets Domestic Macro Adjustments Copyright Mc. Graw-Hill/Irwin, 2002

INTERNATIONAL EXCHANGERATE 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 13 Next Slide The Gold Standard: Fixed Exchange Rates 1879 - 1934 Devaluation The Bretton Woods System IMF - Pegged Exchange Rates Official Reserves Gold Sales IMF Borrowing Managed Floating Exchange Rates G-8 Nations Interventions Copyright Mc. Graw-Hill/Irwin, 2002

RECENT U. S. TRADE DEFICITS 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 Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 14 Next Slide Causes of the Trade Deficits • American Economic Growth • Declining U. S. Savings Rates Implications of U. S. Trade Deficits • Increased Current Consumption • Increased U. S. Indebtedness Copyright Mc. Graw-Hill/Irwin, 2002

balance of payments current account balance on goods & services trade deficit trade surplus balance on current account capital account balance on capital account official reserves balance of payment deficits & surpluses flexible-or-floating-exchangerate system Copyright Mc. Graw-Hill/Irwin, 2005 fixed exchange-rate system purchasing-power-parity theory currency interventions exchange controls gold standard devaluation Bretton Woods system International Monetary Fund (IMF) managed floating exchange rates BACK END

U. S. Export Transaction U. S. Import Transaction Coming soon. . . Balance of Payments Flexible Exchange Rates The Market for Currency Determinants of Exchange Rates Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U. S. Trade Deficits Key Terms Previous Slide End Show 21 - 16 THE ECONOMICS OF DEVELOPING COUNTRIES CHAPTER Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 22 WEB