Unit 8: International Trade & Finance

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Presentation transcript:

Unit 8: International Trade & Finance Modules 41-44 Review Module 4

Module 41 Key Terms & Review Capital Flows & the Balance of Payments Current account Trade balance Financial account Review loanable funds graph 1. 2. 3. 4. 5.

Circular Flow Revisited

Balance of Payments Accounts Summary of a county’s transactions with other countries

Balance of Payments cont. Current Account Financial Account The CA & FA should offset each other

Current Account

The Financial Account Measures net sales of assets (currencies, stocks, factories) to foreigners

Determinants of Capital Flows Why are interest rates different across countries? Capital flows both ways Read “Two-Way Capital Flows”, pgs. 414-5

Module 42 Key Terms & Review The Foreign Exchange Market Equilibrium exchange rate Appreciate Depreciate Real exchange rate Purchasing power parity 1. 2. 3. 4. 5.

Role of the Exchange Rate What ensures that a country’s balance of payments actually balances out? Foreign exchange market determines the price at which one currency is traded for another Appreciation – Depreciation – What causes these changes?

Equilibrium Exchange Rate

Shifts in Supply & Demand

Example: Increase in Demand for U.S. $ An increase in demand for U.S. $ could be caused by Increase in demand causes U.S. $ to appreciate Consequences

Example: Decrease in Demand for U.S. $ An decrease in demand for U.S. $ could be caused by Decrease in demand causes U.S. $ to depreciate Consequences

Inflation & Real Exchange Rates Real exchange rates are adjusted for differences in aggregate price levels across countries Example

Purchasing Power Parity Nominal exchange rate at which a given market basket of goods would cost the same amount in each country

Module 43 Key Terms & Review Exchange Rate Policy Fixed exchange rate Floating exchange rate Foreign exchange reserves Devaluation Revaluation 1. 2. 3. 4. 5.

Exchange Rate Regimes Governments / central banks can influence their country’s exchange rate Fixed exchange rates Floating exchange rates

Fixing Exchange Rates

Fixed Exchange Rates Pros Cons

Exchange Rates & Macroeconomic Policy Adopting a fixed exchange rate or an international currency (such as the euro) takes away a country’s independence regarding monetary policy

Not-so-fixed exchange rates Even countries that adopt fixed exchange rates often change their target rate

Floating Exchange Rates & Monetary Policy Monetary policy used to solve domestic problems has a spillover effect on foreign exchange

Monetary Policy & the Exchange Rate

International Business Cycles Supply or demand shocks in one country can lead to a change in X & M, affecting the economies of your trading partners

Module 44 Key Terms & Review Barriers to Trade Protectionism Tariff Import quota 1. 2. 3. 4. 5.

The U.S. Ceramic Plate Market w/ Imports

A $3 Tariff on Ceramic Plates

A Ceramic Plates Quota of 2 million

Unit 8 Review (pgs. 455-7) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.