1. Copyright ©2003, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 2nd Edition Chapter 17: International Finance

2. Carbaugh, Chap. 17 2 US balance of payments, 2000 Balance of Payments Current account$ bill. Merchandise trade balance-449.9 Merchandise exports+772.5 Merchandise imports-1,222.4 Services balance+81.0 Income flows, net-13.3 Unilateral transfers, net-53.2 Balance on current account-435.4 Capital account US capital inflow+952.4 US capital outflow-552.6 Statistical discrepancy35.6 Balance on capital account435.4 Source: US Dept. of Commerce, Survey of Current Business, May 2000

3. Carbaugh, Chap. 17 3 US balance of payments 1970-98 ($ bill.) Balance of Payments 1980-25.56.130.1-8.32.4 1982-36.512.329.8-17.1-11.5 1984-112.53.330.0-20.6-99.8 1986-145.16.311.8-24.2-151.2 1988-127.012.211.6-25.0-128.2 1990-109.030.220.7-33.7-91.8 1992-96.155.74.5-32.0-67.9 1994-166.159.9-9.2-35.8-151.2 1996-191.482.814.2-40.5-134.9 1998-247.978.8-22.5-41.9-233.5 2000-449.981.0-13.3-53.2-435.4 MerchandiseServicesNet incomeNet unilateralCurrent account Yeartrade balancebalanceflowstransfersbalance Source: US Dept. of Commerce, Survey of Current Business, various issues

4. Carbaugh, Chap. 17 4 Effects of a stronger or weaker dollar Exchange Rates Disadvantages 1. US consumers face higher prices on foreign goods. 2. Higher prices on foreign goods contribute to higher inflation in the US 3. US consumers find traveling abroad more costly. 4. It is more difficult for US firms and investors to expand into foreign markets. Strengthening (appreciating) dollar Advantages 1. US consumers see lower prices on foreign goods. 2. Lower prices on foreign goods help keep US inflation low. 3. US consumers benefit when they travel to foreign countries. 4. US investors can purchase foreign stocks and bonds at "lower" prices. Disadvantages 1. US exporting firms find it harder to compete in foreign markets 2. US firms in import-competing markets find it harder to compete with cheaper foreign goods. 3. Foreign tourists find it more expensive to visit the United States 4. It is more difficult for foreign investors to provide capital to the United States. Weakening (depreciating) dollar Advantages 1. US exporting firms find it easier to sell goods in foreign markets 2. Import-competing firms in the US can make higher profits 3. More foreign tourists can afford to visit the US 4. US capital markets become more attractive to foreign investors.

5. Carbaugh, Chap. 17 5 Exchange rate determination Exchange Rates (a) Foreign exchange market equilibrium Dollars per Pound E D0D0 S0S0 Depreciation Appreciation

6. Carbaugh, Chap. 17 6 (c) Adjusting to an increase in supply Dollars per Pound E G D0D0 S0S0 S1S1 Exchange rate determination (cont'd) Exchange Rates (b) Adjusting to an increase in demand Dollars per Pound E F D0D0 S0S0 D1D1

7. Carbaugh, Chap. 17 7 Exchange rate systems, 2000 Exchange Rates Source: IMF, International Financial Statistics, December 2000 Number Exchange rate regimeof countries Independently floating49 Managed floating27 Crawling pegs12 Fixed/pegged arrangements51 Currency board arrangement8 Exchange arrangement based on another currency as legal tender38 185

8. Carbaugh, Chap. 17 8 Exchange rate stability and managed floating exchange rates Exchange Rates Dollars per Pound D0D0 S0S0 D1D1 S1S1