1. International Trade

2. Balance of Payments Accounts – payments both enter and exit the U.S.
Current Account – no long term liabilities are created
Balance of Payments on Goods and Services
a. Exports – imports
Factor Income
Payments for the use of factors of production (land, labor, capital, entrepreneurial ability)
International Transfers
Money sent by immigrants to their families in other countries

3. Balance of Payments Accounts
Current Account – no long term liabilities are created
Financial Account – buying and selling of assets that create future liabilities
Current Account + Financial Account = 0
1. In the U.S. the current account is usually negative –
we import more than we export
2. This puts dollars in foreign hands
3. Those $ used to buy assets in the U.S. – making
financial account positive.

4. Are the following activities part of the current account or the financial account?

5. Harley-Davidson USA purchases $25 million in production machinery from a Japanese company.
Current account

6. Mike Johnson, U.S. entrepreneur, invests $50 million to develop a theme park in Malaysia
Financial account

7. A Chinese company sells $1 million worth of berets to the U.S. Army.
Current account

8. Each month, Ima Grent, who recently arrive in the U. S
Each month, Ima Grent, who recently arrive in the U.S., sends half her paycheck to her sister in Poland.
Current account

9. A Brazilian investor buys five $10,000 U.S. Treasury bonds.
Financial account

10. Review of Current Accounts.

11. How much is the merchandise trade balance? $200 – 80 = $120
Payments from foreigners
Payments to foreigners
Sales of assets to foreigners
Purchase of assets from foreigners
Goods
$200
$80 -
Services 50 20
Factor Income 70 10
Transfer Payments
Official Sales and purchases
100
300
Private sales and purchases -- 80
How much is the merchandise trade balance?
$200 – 80 = $120
How much is the balance of payments on goods and services?
($ ) – ( ) = $150
How much is the Net International factor income?
70 – 10 = 60

12. How much are Net international transfer payments? 10 – 20 = -10
Payments from foreigners
Payments to foreigners
Sales of assets to foreigners
Purchase of assets from foreigners
Goods
$200
$80 -
Services 50 20
Factor Income 70 10
Transfer Payments
Official Sales and purchases
100
300
Private sales and purchases -- 80
How much are Net international transfer payments?
10 – 20 = -10
What is the balance of payments on current accounts?
(200 – 80) + (50 – 20) + (70 – 10) + (10 – 20) = 200
What is the balance of payments on financial accounts?
(100 – 300) + (80 – 80) = -200

13. Foreign Exchange Market
A. Goods and services produced in a country must be
paid for in that country’s currency
B. Exchange rates
1. price set by supply and demand in the global
economic market
2. the price of domestic currency is expressed in
terms of another currency
a. $1 domestic currency = X foreign currency

14. Cost of foreign currency in U.S. dollars 1 foreign currency = $X
Cost of U.S. dollar in foreign currency
1 dollar = X foreign currency
May
August
Mexican Peso
0.1101
0.1502
9.083
6.6558
British Pound
1.4
1.8
0.71
0.56
Canadian Dollar
0.64
0.63
1.5625
1.5873
European Euro
0.87
0.91
1.149
1.099
Swedish Krona
0.094
0.093
10.638
10.753
Japanese Yen
0.0083
0.0090
May
August
Dinner costs 500 Mexican Pesos
Hotel room costs 30,000 Yen
BMW costs 85,000 euros in Germany
Swedish meatballs cost 30 kronor
Pants cost 72 pounds in London
Jacket costs 1,800 Canadian dollars
$55.05
$75.10
$249.00
$270.00
$73,977.37
$77,343.04
$2.82
$2.79
$101.41
$128.57 $ $

15. C. Graph 1. X axis – dollars demanded at a given rate
2. y axis – exchange rate
3. The supply of U.S. dollars is determined by U.S.
demand for foreign goods, services, and investments.
4. The demand for U.S. dollars is determined by
foreign demand for U.S. goods, services, and investments.
Euros_
Dollars
Other currency
Currency you are analyzing

16. D. Appreciate
1. a country’s currency is more valuable in terms of other currencies
2. Demand for the currency goes up
3. Supply of the currency goes down
4. an increase in the exchange rate
5. When a dollar appreciates you get more foreign currency for your $
6. exports decrease, imports increase

17. E. Depreciate
1. a country’s currency is LESS valuable in terms of other currencies
2. Demand for the currency goes down
3. Supply of the currency goes up
4. a decrease in the exchange rate
5. When a dollar depreciates you get less foreign currency for
your $
6. exports increase, imports decrease

18. Did the dollar appreciate or depreciate?
May
August
Dinner costs 500 Mexican Pesos
$55.05
$75.10
Hotel room costs 30,000 Yen
$249.00
$270.00
BMW costs 85,000 euros in Germany
$73,977.37
$77,343.04
Swedish meatballs cost 30 kronor
$2.82
$2.79
Pants cost 72 pounds in London
$101.41
$128.57
Jacket costs 1,800 Canadian dollars $ $
depreciated
depreciated
depreciated
appreciated
depreciated
appreciated

19. Usually when working exchange problems you will have two supply/demand graphs side by side.
Demand and supply for U.S. dollars
Demand and supply for Euros
Euros_
Dollars
Dollars
Euros S S er er D D Q
Quantity U.S. Dollars Q
Quantity Euros
Currency you are analyzing goes here

20. Economic Conditions and policies affect exchange rates and shift the curves
1. Interest Rates
a. High interest rates attract foreign investors
b. Increase demand for domestic currency
2. Income
a. as income increases so does consumption of both foreign and domestic goods
b. Increase demand for currency
3. Price Level
a. A country that experiences inflation will also have a depreciated currency
b. They will export fewer goods- lower demand for their currency
4. Taste

21. The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.
Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases
Demand and supply for U.S. dollars
Demand and supply for Euros
Euros_
Dollars
Dollars
Euros S S er er D D Q
Quantity U.S. Dollars Q
Quantity Euros

22. To buy euros, the Americans will supply U.S. dollars
The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.
Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases
To buy euros, the Americans will supply U.S. dollars
Demand and supply for U.S. dollars
Demand and supply for Euros
Euros_
Dollars
Dollars
Euros S S
er1 er er D1 D D Q
Quantity U.S. Dollars Q Q1
Quantity Euros

23. To buy euros, the Americans will supply U.S. dollars
The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.
Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases
To buy euros, the Americans will supply U.S. dollars
Demand and supply for U.S. dollars
Demand and supply for Euros
Euros_
Dollars
Dollars
Euros S S S1
er1 er er
er1 D1 D D Q Q1
Quantity U.S. Dollars Q Q1
Quantity Euros

24. U.S. Dollar depreciates Euro appreciates
The exchange rate decrease; that is, the number of euros it takes to buy a U.S. dollar decreases
The exchange rate increases, that is, the number of U.S. dollars to takes to buy a euro increases
Euros_
Dollars
Dollars
Euros S S S1
er1 er er
er1 D1 D D Q Q1
Quantity U.S. Dollars Q Q1
Quantity Euros

25. French Tourists flock to Mexico’s beaches
French demand Pesos to pay for their Mexican vacations. French supply Euros to buy the Pesos they need.
Demand and supply for Pesos
Demand and supply for Euros
Euros_
Peso
Pesos_
Euros S S er er D D Q
Quantity Mexican Pesos Q
Quantity Euros

26. French Tourists flock to Mexico’s beaches
French demand Pesos to pay for their Mexican vacations. French supply Euros to buy the Pesos they need.
Demand and supply for Pesos
Demand and supply for Euros
Euros_
Peso
Pesos_
Euros S S
er1 S1 er er D1
er1 D D Q Q1
Quantity Mexican Pesos Q Q1
Quantity Euros
Appreciate or Depreciate
Appreciate or Depreciate

27. French Tourists flock to Mexico’s beaches
Demand and supply for Pesos
Demand and supply for Euros
Euros_
Peso
Pesos_
Euros S S
er1 S1 er er D1
er1 D D Q Q1
Quantity Mexican Pesos Q Q1
Quantity Euros
Appreciate
Depreciate

28. U.S. Children Want Videos Produced in Japan
Americans demand Yen to pay for their videos. Americans supply dollars to buy their Yen.
Demand and supply for U.S. Dollars
Demand and supply for Yen
yen__
dollars
dollars
yen S S er er D D Q
Quantity
Dollars Q
Quantity Yen

29. U.S. Children Want Videos Produced in Japan
Demand and supply for U.S. Dollars
Demand and supply for Yen
yen__
dollars
dollars
yen S S S1
er1 er er
er1 D1 D D Q Q1
Quantity
Dollars Q Q1
Quantity Yen
Appreciate or Depreciate
Appreciate or Depreciate

30. U.S. Children Want Videos Produced in Japan
Americans demand Yen to pay for their videos. Americans supply dollars to buy their Yen.
Demand and supply for U.S. Dollars
Demand and supply for Yen
yen__
dollars
dollars
yen S S S1
er1 er er
er1 D1 D D Q Q1
Quantity
Dollars Q Q1
Quantity Yen
Depreciate
Appreciate

31. Japan’s Real GDP Increases
As income in Japan increases, the Japanese purchase more domestic and U.S. goods. Demand for U.S. goods increases, the demand for the U.S. dollar increases, and the number of Japanese yen it takes to purchase a U.S. dollar increases.
Demand and supply for U.S. Dollars
Demand and supply for Yen
yen__
dollars
dollars
yen S S er er D D Q
Quantity
Dollars Q
Quantity Yen

32. Japan’s Real GDP Increases
As income in Japan increases, the Japanese purchase more domestic and U.S. goods. Demand for U.S. goods increases, the demand for the U.S. dollar increases, and the number of Japanese yen it takes to purchase a U.S. dollar increases.
Demand and supply for U.S. Dollars
Demand and supply for Yen
yen__
dollars
dollars
yen S S
er1 S1 er er D1
er1 D D Q Q1
Quantity
Dollars Q Q1
Quantity Yen
Appreciate
Depreciate

33. Real Interest Rates in the U.S. increase Relative to Great Britain
The increase in U.S. real interest rates makes investing in the U.S. more attractive to investors in Great Britain. Thus, the demand for the U.S. dollar increases. The supply of the pound increases
Demand and supply for U.S. Dollars
Demand and supply for British Pound
Pound
dollars
dollars
Pound S S er er D D Q
Quantity
Dollars Q
Quantity Pound

34. Appreciate Depreciate
Real Interest Rates in the U.S. increase Relative to Great Britain
The increase in U.S. real interest rates makes investing in the U.S. more attractive to investors in Great Britain. Thus, the demand for the U.S. dollar increases. The supply of the pound increases
Demand and supply for U.S. Dollars
Demand and supply for British Pound
Pound
dollars
dollars
Pound S S
er1 S1 er er D1
er1 D D Q Q1
Quantity
Dollars Q Q1
Quantity Pound
Appreciate
Depreciate

35. Europe Experiences a Recession
Demand for U.S. goods decreases and the U.S. dollar decreases as income falls across Europe
Demand and supply for U.S. Dollars
Demand and supply for Euros
Euros
dollars
dollars
Pound S S er er D D Q
Quantity
Dollars Q
Quantity Euros

36. Depreciate Appreciate Europe Experiences a Recession
Demand for U.S. goods decreases and the U.S. dollar decreases as income falls across Europe
Demand and supply for U.S. Dollars
Demand and supply for Euros
Euros_
dollars S1
dollars
Euro S S
er1 er er
er1 D D1 D Q1 Q
Quantity
Dollars Q1 Q
Quantity Euros
Depreciate
Appreciate

37. The Price Level in Canada Increases Relative to the United States
Canadians would want to buy more U.S. goods and thus demand more dollars. That means that Canadians would want to supply more Canadian dollars to do so
Demand and supply for U.S. Dollars
Demand and supply for Canadian $
Canadian $
dollars
__dollars__
Canadian $ S S er er D D Q
Quantity
Dollars Q
Quantity Canadian $

38. Appreciate Depreciate
The Price Level in Canada Increases Relative to the United States
Canadians would want to buy more U.S. goods and thus demand more dollars. That means that Canadians would want to supply more Canadian dollars to do so
Demand and supply for U.S. Dollars
Demand and supply for Canadian $
Canadian $_
dollars
_dollars__
Canadian $ S S
er1 S1 er er D1
er1 D D Q Q1
Quantity Canadian $
Quantity
Dollars Q Q1
Appreciate
Depreciate

39. Final Review