1. TRADE
BOP and F/X

3. Balance of Payments = Current Account Balance vs Capital Account Balance
Always sums to 0.

4. GDP = C + I + G + (X-M)

5. Current Account Balance
4 components
1) Balance of trade in goods
Rev from X - Exp on M
Injections and leakages
2) Invisible Balance
Rev from X Services - Exp on M services
All services
3 & 4) Net Income Flows
A) Grants and foreign aid
B) Foreign profits repatriated/savings bonds
ALL Add up to (X- M)

6. 4 Factor Circular Flow

7. Top Surplus

8. The Capital Account Balance
Assets
Ownership Assets 
Lending Assets 
Foreign currency reserves
How many of your assets are owned by a foreign company or country?
Surplus vs deficit
Chinese Investment Council story

12. Chrysler Building

13. So… If all components of Curr Acc. Balance add up to a DEFICIT
Then Capital Account Balance should be a
SURPLUS

15. BOP

16. Curr Account SURPLUS vs DEFICIT

17. III. Possible Consequences
Of a Curr. Account Deficit
Run out of F/X reserves
Reduced AD
Depreciation of exchange rate
Unemployment
Economic sovereignty issues
Interest paid on foreign debt
Political pressure for protectionism
Of a Curr. Account Surplus
Can lead to retaliation
Long term harms exporters (F/X rate)
measured in terms of % of GDP

18. Consequences of a Capital Account Surplus
Indicator of …..
CAB deficit
Could be sign of inflation
BIG ASSUMPTION QUESTION
Surplus based on Ownership or Lending Assets
 or  ?

19. Capital Account Deficit
Means CAB surplus
Leads to currency appreciation (more on this later)

21. IV. How to fix a CAB deficit
Not a short term problem
But Long TERM…
A) Expenditure Switching
Get them to consume domestic products
B) Expenditure Reducing
Theoretical.
Could harm domestic economy
C) Supply Side
Market or forced intervention

23. V. Foreign Exchange FOREX
Volume
London, New York, Zurich, Frankfurt, Tokyo
Gov’t, central banks, private banks, MNCs
Exchange rate index vs…

26. Change for Good

27. CURRENCY EXCHANGE CURRENCY 5 Euros = $6.50 100 Baht (Thailand) = $2.59
5 Canadian = $4.08
20 Pesos (Mex) = $1.77
50 Pesos(Mex) = $4.44
10 Pesos (Nic) = .61
2000 Colones (CR) = $4.33
1000 Colones (CR) = $2.16
500 Colones (CR) = $1.08
2 Belizian = $1.00
100,000 Pesos Bolvianos = OLD
1 Gourde (Haiti) = .027
5,000 Riel (Cambodian) = $1.30
100 Riel = .026
1000 Won (S. Korea) = .98
£5 (British Pounds) = $9.30
2009 CURRENCY
5 Euros =
100 Baht (Thailand) =
5 Canadian = 3.87
20 Pesos (Mex) = 1.30
50 Pesos(Mex) = 3.26
10 Pesos (Nicaragua) = 0.49
2000 Colones (CR) = 3.55
1000 Colones (CR) = 1.77
500 Colones (CR) = 0.88
2 Belizian = 1.01
100,000 Pesos Bolvianos = OLD
1 Gourde (Haiti) = .025
5,000 Riel (Cambodian) = 1.21
100 Riel = .024
1000 Won (S. Korea) = .64
£5 (British Pounds) = 7.05
500 (Congo) = 0.70
10 Lira (Turkey) = 5.76
20 Francs (Swiss) = 16.94

28. 2011 CURRENCY
5 Euros = USD
100 Baht (Thailand) = USD
5 Canadian = USD
20 Pesos (Mex) = 1.66 USD
10 Pesos (Nicaragua) = USD
1000 Colones (CR) = 1.97 USD
2 Belizian = .99 USD
1 Gourde (Haiti) = .024 USD
5,000 Riel (Cambodian) = 1.23 USD
1000 Won (S. Korea) = .89 USD
｣5 (British Pounds) = USD
500 (Congo) = .52 USD
10 Lira (Turkey) = 6.29 USD
20 Francs (Swiss) = USD
10 Egyptian Pounds = 1.68 USD
500 Tanzanian Shillings = .32 USD
10 Saudi Riyals = 2.66 USD

29. The Dirham

31. A. Exchange Rate Systems
Fixed
v. One
v. Collection(basket)
v. Gold
Floating - S & D diagram
Managed (Dirty Float)

32. Terminology Fixed Floating Revaluation Devaluation Appreciation
Depreciation

33. Why does it move?
Two components D S
Effect of Curr Acc. Bal. On FX

34. Hi’s and Lo’s ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES
Fights Inflation
Imports increase
Efficiencies in the domestic market
DISADVANTAGES
Exports suffer
Hurts domestic industries
ADVANTAGES
Exports gain
Domestics gain
DISADVANTAGES
inflation

35. B. Gov’t Intervention In
WHY?
HOW?

36. C. EFFECTS Imports vs exports (Current Account Bal) Change in AD
EX: Chinese Yuan

37. The Big Mac Index PPP Over valued vs under valued
Short run vs long run
Start 1 USD = 1.20 GBP, then

38. VI - Terms of Trade Has to do with value
Value of exports vs value of imports
Uses an index (like CPI) aka “basket”
Formula:

39. Divide by
Year
Avg. Export Price Index
Avg. Import Price Index
ToT 1
100 2
102 3
106
104
101.92 4
110 5
108
101.89 6

40. Why does ToT change? SHORT RUN Change in S/D in importing country
Inflation rates in home country
Exchange rates
LONG RUN
Income changes
In LEDC leads to more imports
Elasticity*****

41. How this impacts LEDCs
Most LEDC dependent on one or two commodities for export.
Primary (aka Commodity)
Secondary
Tertiary
Commodity prices are falling
Why?
So?
IMPORTANT: ToT diff than BoP.