U.S. Export Transaction U.S.

Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency

38
Copyright McGraw-Hill/Irwin, 2002

C HAPTE R

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 38 - 1

Next Slide

EXCHANGE RATES, THE BALANCE OF PAYMENTS, AND TRADE DEFICITS

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

$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

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 38 - 2

Next Slide

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

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

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 38 - 3

Next Slide

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 Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

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 McGraw-Hill/Irwin, 2002

Previous Slide End Show 38 - 4

Next Slide

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

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

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

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

Previous Slide End Show 38 - 5

Next Slide

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

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

-80 -70 -60 -50 -40 -30 -20 -10 0 10

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

Australia Brazil Canada

China
Germany Japan

Previous Slide End Show 38 - 6

Next Slide

Mexico Netherlands
Source: Department of Commerce
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

Flexible or Floating-

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

Exchange-Rate System Fixed Exchange-Rate System Depreciation & Appreciation

Previous Slide End Show 38 - 7

Next Slide

Copyright McGraw-Hill/Irwin, 2002

THE MARKET FOR CURRENCY

P Dollar price of one pound
U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency

EXCHANGE RATE: $2 = 1
3

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

Dollar depreciates Dollar appreciates

Previous Slide End Show 38 - 8

Next Slide

D
Quantity of pounds
Copyright McGraw-Hill/Irwin, 2002

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

Changes in Tastes Relative Income Changes Relative Price Changes Purchasing Power Parity Theory Relative Interest Rates Speculation

Previous Slide End Show 38 - 9

Next Slide

Flexible exchange rates automatically adjust to eliminate balance of payments deficits or surpluses.

Copyright McGraw-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

Uncertainty and Diminished Trade

Terms of Trade Changes

Instability
Copyright McGraw-Hill/Irwin, 2002

Previous Slide End Show 38 - 10

Next Slide

FIXED EXCHANGE RATES

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

Fixed Exchange Rates

Use of Reserves
Currency Interventions

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

Trade Policies
Previous Slide End Show 38 - 11 Next Slide
Copyright McGraw-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 38 - 12

Next Slide

Distorted Trade Favoritism Restricted Choice Black Markets Domestic Macro Adjustments
Copyright McGraw-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 38 - 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-7 (G-8) Interventions
Copyright McGraw-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

Causes of the Trade Deficits

American Economic Growth Declining U.S. Savings Rates

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

Implications of U.S. Trade Deficits

Increased Current Consumption Increased U.S. Indebtedness
Copyright McGraw-Hill/Irwin, 2002

Previous Slide End Show 38 - 14

Next Slide

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 McGraw-Hill/Irwin 2002

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 Balance of Payments Flexible Exchange Rates The Market for Currency

Coming soon...

Determinants of Exchange Rates

Fixed Exchange Rates Exchange Controls and Rationing International Exchange Rate Systems Recent U.S. Trade Deficits Key Terms

THE DEVELOPING ECONOMIES

CHAPTER 39

Previous Slide End Show 38 - 16

Next Slide

Copyright McGraw-Hill/Irwin, 2002