1. 36
Exchange Rates, the Balance of Payments, and Trade Deficits

2. Chapter Objectives
How Currencies of Different Nations are Exchanged When International Transactions Take Place
About the Balance Sheet the United States Uses to Account for the International Payments it Makes and Receives
How Exchange Rates are Determined in Currency Markets
The Difference Between Flexible Exchange Rates and Fixed Exchange Rates
The Causes and Consequences of Recent Record-High U.S. Trade Deficits

3. Financing International Trade
U.S. Export Transactions
U.S. Import Transactions
Balance of Payments
The Current Account
Balance on Goods
Balance on Services
Trade Deficit
Trade Surplus
Balance on Current Account
W36.1

4. Financing International Trade
GLOBAL PERSPECTIVE
U.S. Trade Balances in Goods and Services
Select Nations, 2004
Good and Services Deficit
Goods and Services Surplus
Australia
+6.8
Belgium
+4.4
Canada
-66.5
China
-162
Germany
-45.8
Japan
-75.6
Mexico
-45.1
Netherlands
+11.8
-10
-20
-30
-40
-50
-60
-70
-160 10 20
Source: BEA

5. Capital and Financial Account
Capital Account
Financial Account
Balance on the Capital and Financial Account
Payments, Deficits, and Surpluses
Balance-of-Payments Deficits and Surpluses
Official Reserves

6. Flexible Exchange Rates
Flexible or Floating Exchange Rates
Fixed Exchange Rate system
Depreciation and Appreciation
Determinants of Exchange Rates
Changes in Tastes
Relative Income Changes
Relative Price-Level Changes
Purchasing-Power-Parity Theory
Relative Interest Rates
Speculation

7. Flexible Exchange Rates
The Market for Foreign Currency (Pounds) Q
Dollar Price of 1 Pound
Quantity of Pounds P Sl
Exchange
Rate: $2 = £1 $2 $3 $1
Dollar
Depreciates
(Pound
Appreciates)
Dollar
Appreciates
(Pound
Depreciates) Dl Ql

8. Flexible Exchange Rates
The Market for Foreign Currency (Pounds) Q
Dollar Price of 1 Pound
Quantity of Pounds P Sl
Exchange
Rate:
$3 = £1 c $2 $3 $1
Balance
Of Payments
Deficit a x b D2
Exchange
Rate:
$2 = £1 Dl Ql Q2

9. Flexible Exchange Rates
Flexible Rates and the Balance of Payments
Disadvantages of Flexible Exchange Rates
Uncertainty and Diminished Trade
Terms-of-Trade Changes
Instability

10. Fixed Exchange Rates Use of Reserves Trade Policies
Currency Interventions
Trade Policies
Exchange Controls and Rationing
Distorted Trade
Favoritism
Restricted Choice
Black Markets
Domestic Macroeconomic Adjustments

11. International Exchange-Rate Systems
The Gold Standard: Fixed Exchange Rates
Devaluation
Gold Flows
Domestic Macroeconomic Adjustments
Collapse of the Gold Standard

12. International Exchange-Rate Systems
The Bretton Woods System
International Monetary Fund (IMF)
IMF and Pegged Exchange Rates
Official Reserves
Gold Sales
IMF Borrowing
Fundamental Imbalances: Adjusting the Peg
Demise of the Bretton Woods System

13. International Exchange-Rate Systems
The Current System: The Managed Float
Managed Floating Exchange Rates
In Support of the Managed Float
Concerns With the Managed Float

14. Recent U.S. Trade Deficits
Causes of Trade Deficits
Implications of U.S. Trade Deficits
Increased Current Consumption
Increased U.S. Indebtedness

15. Speculation in Currency Markets
Last
Word
Negative or Positive Influence on Currency Markets and Trade
Currency Purchases to Purchase Goods and Services
Contributing to Currency Market Fluctuations
Speculator’s Role and Activities
Smoothing Short-Term Fluctuations
Absorbing Risk
Futures Market at Work
Positive Role Played Overall

16. Key Terms balance of payments current account
balance on goods and services
trade deficit
trade surplus
balance on current account
capital and financial account
balance on capital and financial
balance-of-payments deficits and surpluses
official reserves
flexible- or floating- exchange-rate system
fixed-exchange-rate system
purchasing-power-parity theory
currency interventions
exchange controls
gold standard
devaluation
Bretton Woods system
International Monetary Fund (IMF)
managed floating exchange rates

17. Course Review…
Final
Discussions…
Thanks!