Section 8.

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Presentation transcript:

Section 8

Economic Growth productivity, productivity, productivity!

Key Terms Balance of Payments Accounts Purchasing Power Parity Current Account Exchange Rate Regime Balance of Payments on Goods and Services Fixed Exchange Rate Floating Exchange Rate Merchandise Trade Balance Exchange Market Intervention Financial Account (previously the Capital Account) Foreign Exchange Reserves Foreign Exchange Controls Foreign Exchange Market Devaluation Exchange Rates Revaluation Appreciate Protectionism Depreciate Tariffs Equilibrium Exchange Rate Import Quota Real Exchange Rate

Key Formulas Balance of Payments Current Account = -Financial Account *** statistical discrepancies may occur Real Exchange Rate Real Exchange Rate = foreign currency per US $ *(PUS)/(Pforeign) Purchasing Power Parity PPP = foreign price/domestic price ***PPP is the nominal exchange rate at which goods/services would cost the same amount in each country

The Equilibrium Exchange Rate Foreign currency/ dollar US dollars on the x axis if it is the market for US dollars Shifters

Shifters

Capital Flows Trade Surplus = net capital outflow Trade Deficit = net capital inflow

Capital Flows

Tariffs Demand for ceramic plates with imports World price = $9 With import tariff of $3 – supply of the rest of the world shifts up (it appears to be $12 even if is being sold from foreign country at $9, govt just gets $4) Result --- more domestic sales P Q represent no trade equilibirum

Import Quotas Use graph (Figure 44.4) on p.440 for reference. If the US could import 3 million ceramic plates, that would bring the price down to $9 --- if the import quota is 2 million, that limits supply available to the US market, results in a higher price Supply + quota line --- add quota to supply – find equilibrium with demand

AP Exam Tips The Current Account includes goods and services and cash transfers such as foreign aid, gifts, and grants. The Financial Account tracks assets such as real estate, stocks and bonds. Dividends and interest paid are not assets, so they are counted in the Current Account. The current and financial accounts balance each other out. If there is a surplus in one account there is a deficit in the other. The financial account will have capital inflows and capital outflows based on changes in interest rates. This is financial capital and not capital in the form of machinery and equipment used in the production process. The foreign exchange