Principles of Economics 2nd edition by Fred M Gottheil PowerPoint Slides prepared by Ken Long ©1999 South-Western College Publishing

Exchange Rates, Balance of Payments, and International Debt Chapter 32 Exchange Rates, Balance of Payments, and International Debt 6/2/2018 ©1999 South-Western College Publishing

This chapter discusses principles associated with Appreciation and Depreciation of Currencies Floating and Fixed Exchange Rates International Debt and Debt Service Foreign Exchange Markets Exchange Rates Arbitrage Devaluation Balance of Payments ©1999 South-Western College Publishing

What determines the demand for a currency on the international market? Foreigners demand a another country’s currency for what that currency can buy in that country ©1999 South-Western College Publishing

What is a country’s Exchange Rate? The price of one country’s currency measured in terms of another country’s currency ©1999 South-Western College Publishing

What determines the exchange rates of different currencies? The supply and demand for that currency on the international market ©1999 South-Western College Publishing

What determines the Supply and Demand of a currency? Relative ... price levels rates of interest rates of growth political & economic stability ©1999 South-Western College Publishing

What causes the Supply Curve for a currency to shift? Changes in ... Income Tastes Interest rates ©1999 South-Western College Publishing

D S1 S2 Q1 Q2 P1 P2 Right Shift in Supply 9 ©1999 South-Western College Publishing

What causes the Demand Curve for a currency to shift? Changes in ... Income Tastes Interest rates ©1999 South-Western College Publishing

S D2 D1 Q1 Q2 P2 P1 Right Shift in Demand 11 ©1999 South-Western College Publishing

What is a Floating Exchange Rate? An exchange rate determined strictly by the demands and supplies for a nation’s currency ©1999 South-Western College Publishing

What does it mean that a currency has Appreciated? A rise in the price of a nation’s currency relative to foreign currencies ©1999 South-Western College Publishing

What does it mean that a currency has Depreciated? A fall in the price of a nation’s currency relative to foreign currencies ©1999 South-Western College Publishing

What creates mutually consistent Exchange Rates? Arbitrage ©1999 South-Western College Publishing

What is Arbitrage? The practice of buying a foreign currency in one market at a low price and selling it in another at a higher price ©1999 South-Western College Publishing

What is a problem with Floating Exchange Rates? The value of a currency may change from the time of ordering a product and when the product is delivered ©1999 South-Western College Publishing

How do we minimize this problem? A country can try to fix the value of its currency through the process of buying and selling it on the world market ©1999 South-Western College Publishing

How can a country decrease the value of another nation’s currency relative to its own? It can take the other country’s currency and sell it on the foreign exchange market, thus increasing the supply ©1999 South-Western College Publishing

What is a Foreign Exchange Reserve? The stock of foreign currencies a government holds ©1999 South-Western College Publishing

How can a county lower the value of its currency on the foreign exchange market? It can sell its currency for foreign currencies, thus increasing the supply ©1999 South-Western College Publishing

From the International Monetary Fund (IMF) Beside Foreign Exchange Reserves, where else can a country get a foreign currency? From the International Monetary Fund (IMF) ©1999 South-Western College Publishing

For information on Exchange Rates: http://www.bog.frb.fed.us/releases/H10 ©1999 South-Western College Publishing

What is the IMF? An international organization formed to make loans of foreign currencies to countries facing balance of payments problems ©1999 South-Western College Publishing

What is a country’s Balance of Payments? An itemized account of a nation’s foreign economic transactions ©1999 South-Western College Publishing

What does it mean to have a Favorable Balance of Payments? More money is entering a country than leaving the country ©1999 South-Western College Publishing

What does it mean to have a Payments Deficit? More money is leaving a country than entering a country ©1999 South-Western College Publishing

When is there a balance in a country’s Balance of Payments? When the amount of money entering equals the amount of money leaving ©1999 South-Western College Publishing

Why can a Payments Surplus be a problem? Too much money entering a country over time can cause inflation ©1999 South-Western College Publishing

Why can a Payments Deficit be a problem? Too much money leaving a country over time can cause unemployment ©1999 South-Western College Publishing

What is the difference between a Balance of Payments and a Balance of Trade? The balance of payments measures the flow of all money, whereas the balance of trade considers only imports and exports ©1999 South-Western College Publishing

What are additional ways money can enter or leave a country? Imports and exports of services Income receipts and payments on investments Unilateral transfers Buying & selling of assets ©1999 South-Western College Publishing

Can the Balance of Payments offset the Balance of Trade? Money can leave a country because of trade - but more money can enter the country in other areas ©1999 South-Western College Publishing

What is the Balance on Capital Account? A category that itemizes changes in the foreign asset holdings of a nation and that nation’s asset holdings abroad ©1999 South-Western College Publishing

Is a Payments Deficit a good or bad indicator of how well we are doing? A good indicator, it shows that we are able to buy from foreigners more than they buy from us ©1999 South-Western College Publishing

What can cause a Payments Surplus? a healthy economy relatively high interest rates government borrowing relatively higher productivity ©1999 South-Western College Publishing

What is a major problem for many less-developed countries? High international debt ©1999 South-Western College Publishing

What is a country’s International Debt? The total amount of outstanding IOU’s a nation is obligated to repay other nations and international organizations ©1999 South-Western College Publishing

What is a country’s Debt Service? Interest payments on international debt as a percentage of a nation’s merchandise exports ©1999 South-Western College Publishing

In the long run, how will a Payments Surplus be corrected? ©1999 South-Western College Publishing

When too much money enters the value increases internationally as the demand has increased The higher value makes foreign goods less expensive and our goods more expensive to foreigners As less money enters our country and more money leaves, our surplus problem is solved ©1999 South-Western College Publishing

In the long run, how will a Payments Deficit be corrected? ©1999 South-Western College Publishing

When too much money leaves the value decreases internationally as the supply increases The lower value makes foreign goods more expensive and our goods less expensive to foreigners As more money enters our country and less money leaves, our deficit problem is solved ©1999 South-Western College Publishing

S D P1 P3 P2 Q3 Surplus Deficit 44 ©1999 South-Western College Publishing

http://www.xe.net/currency http://www.bog.frb.fed.us/releases/H10 http://biz.yahoo.com/reports/currency.html http://www.xe.net/currency http://www.bog.frb.fed.us/releases/H10 http://www.imf.org/external/news.htm http://www.bea.doc.gov/bea/bpatbl-d.html http://www.ita.doc.gov/industry/otea/usftu/usftu.html 4545 ©1999 South-Western College Publishing

What determines the demand for a currency internationally? What is a country’s Exchange Rate? What determines the exchange rates of different currencies? What determines the Supply and Demand of a currency? What is Appreciation?

What is Depreciation? What is Balance of Payments? What does it mean to have a Favorable Balance of Payments? What does it mean to have a Payments Deficit? In the long run, how will a Payments Surplus be corrected? In the long run, how will a Payments Deficit be corrected?

END ©1999 South-Western College Publishing