Matakuliah : J0114-Teori Ekonomi Tahun : 2009 EXCHANGE RATE, THE BALANCE OF PAYMENTS, AND TRADE DEFICITS Pertemuan 26

Financing International Trade 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 W36.1 Bina Nusantara University

Financing International Trade GLOBAL PERSPECTIVE U.S. Trade Balances in Goods and Services Select Nations, 2004 Good and Services Deficit Goods and Services Surplus Australia +6.8 Belgium +4.4 Canada -66.5 China -162 Germany -45.8 Japan -75.6 Mexico -45.1 Netherlands +11.8 Bina Nusantara University Source: BEA -10 -20 -30 -40 -50 -60 -70 -160 10 20

Capital and Financial Account Capital Account Financial Account Balance on the Capital and Financial Account Payments, Deficits, and Surpluses Balance-of-Payments Deficits and Surpluses Official Reserves Bina Nusantara University

Flexible Exchange Rates Flexible or Floating Exchange Rates Fixed Exchange Rate system Depreciation and Appreciation Determinants of Exchange Rates Changes in Tastes Relative Income Changes Relative Price-Level Changes Purchasing-Power-Parity Theory Relative Interest Rates Speculation Bina Nusantara University

Flexible Exchange Rates The Market for Foreign Currency (Pounds) P Sl Exchange Rate: $2 = £1 $2 $3 $1 Dollar Depreciates (Pound Appreciates) Dollar Price of 1 Pound Dollar Appreciates (Pound Depreciates) Dl Bina Nusantara University Ql Q Quantity of Pounds

Flexible Exchange Rates The Market for Foreign Currency (Pounds) P Sl Exchange Rate: $3 = £1 c $3 Balance Of Payments Deficit Dollar Price of 1 Pound x a b $2 D2 Exchange Rate: $2 = £1 $1 Dl Ql Q2 Bina Nusantara University Q Quantity of Pounds

Flexible Exchange Rates Flexible Rates and the Balance of Payments Disadvantages of Flexible Exchange Rates Uncertainty and Diminished Trade Terms-of-Trade Changes Instability Bina Nusantara University

Fixed Exchange Rates Use of Reserves Trade Policies Currency Interventions Trade Policies Exchange Controls and Rationing Distorted Trade Favoritism Restricted Choice Black Markets Domestic Macroeconomic Adjustments Bina Nusantara University

International Exchange-Rate Systems The Gold Standard: Fixed Exchange Rates Devaluation Gold Flows Domestic Macroeconomic Adjustments Collapse of the Gold Standard Bina Nusantara University

International Exchange-Rate Systems The Bretton Woods System International Monetary Fund (IMF) IMF and Pegged Exchange Rates Official Reserves Gold Sales IMF Borrowing Fundamental Imbalances: Adjusting the Peg Demise of the Bretton Woods System The Current System: The Managed Float Managed Floating Exchange Rates In Support of the Managed Float Concerns With the Managed Float Bina Nusantara University