External Sector Econ 102 _2013

External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services 2)There are exchange of Assets What is different? We have Turkish Lira (TL), US has US dollars ($) and European Union has Euro(€)

Foreign currency Exchange rate is the TL price of a foreign currency in Turkey. Eg. 1 $= 2.17 TL (TL price of one dollar) or 0.46 $ = 1 TL ( dollar price of one TL) If TL price of a $ increases, TL depreciates (TL becomes less valuable compared to $)

Exchange of Goods and Services Exports are the goods that we sell (and foreign economies buy). Hence, it is a source of foreign exchange. Exports= F( Y foreign, exchange rate) Imports are the good that we buy (foreign sell to us). Hence we use foreign exchange to purchase imports Imports= F( Y domestic, exchange rate)

Net Exports Net Exports = value of Exports- value of imports Net Exports = F( Y domestic, Y foreign, exchange rate) This is also called the Trade Balance

Exchange of Financial Assets We exchange Bonds, Shares, other assets. Asset demand = (i domestic – i foreign, other risk factors )

How are the foreign transaction recorded? Balance of Payments: (Ödemeler Dengesi) Accounting method of all monetary transactions, with double entry system. Every transaction is recorded in different parts of the Balance of Payments.

Balance of Payments 1.Current Account 2.Financial Account 3.Balance of Capital Account

Current Account -Exports of goods (+) -Imports of goods (-) -Balance of trade -Exports of services(+) -Imports of services(-) -Balance of services -Income received on investment (+) -Income payments on investment (-) -Net income on investment -Net transfers (+) (-) -Balance on current account

Financial Account -Increase in foreign holdings of assets in Turkey (+) -Increase in Turkey’s holding of assets in foreign countries (- ) -Balance on Financial Account

Capital Account -Statistical Discrepancy -Balance of Payments

Foreign Exchange Market Systems of Foreign Exchange: 1.Fixed Exchange Rate System: Central Bank determines the rate at which domestic currency is exchanged in to foreign currency. 2.Flexible Exchange Rate System: market determines the the rate at which domestic currency is exchanged in to foreign currency

Foreign Exchange Market TL price of foreign currency Quantity of Foreign Currency Demand for foreign currencySupply of Foreign Currency

The Change in Foreign Exchange Market Equilibrium when Turkish Imports increase TL price of foreign currency Quantity of Foreign Currency Demand for foreign currencySupply of Foreign Currency The TL price of US dollar increases, i.e. TL depreciates

The Change in Foreign Exchange Market Equilibrium when Turkish residents purchase Foreign Bonds TL price of foreign currency Quantity of Foreign Currency Demand for foreign currencySupply of Foreign Currency The TL price of US dollar increases, i.e. TL depreciates