1. Unit 8: International Trade & Finance
Modules 41-44
Review Module 4

2. Module 41 Key Terms & Review Capital Flows & the Balance of Payments
Current account
Trade balance
Financial account
Review loanable funds graph 1. 2. 3. 4. 5.

3. Circular Flow Revisited

4. Balance of Payments Accounts
Summary of a county’s transactions with other countries

5. Balance of Payments cont.
Current Account
Financial Account
The CA & FA should offset each other

6. Current Account

7. The Financial Account
Measures net sales of assets (currencies, stocks, factories) to foreigners

9. Determinants of Capital Flows
Why are interest rates different across countries?
Capital flows both ways
Read “Two-Way Capital Flows”, pgs

10. Module 42 Key Terms & Review The Foreign Exchange Market
Equilibrium exchange rate
Appreciate
Depreciate
Real exchange rate
Purchasing power parity 1. 2. 3. 4. 5.

11. Role of the Exchange Rate
What ensures that a country’s balance of payments actually balances out?
Foreign exchange market determines the price at which one currency is traded for another
Appreciation –
Depreciation –
What causes these changes?

12. Equilibrium Exchange Rate

13. Shifts in Supply & Demand

14. Example: Increase in Demand for U.S. $
An increase in demand for U.S. $ could be caused by
Increase in demand causes U.S. $ to appreciate
Consequences

15. Example: Decrease in Demand for U.S. $
An decrease in demand for U.S. $ could be caused by
Decrease in demand causes U.S. $ to depreciate
Consequences

16. Inflation & Real Exchange Rates
Real exchange rates are adjusted for differences in aggregate price levels across countries
Example

17. Purchasing Power Parity
Nominal exchange rate at which a given market basket of goods would cost the same amount in each country

18. Module 43 Key Terms & Review Exchange Rate Policy
Fixed exchange rate
Floating exchange rate
Foreign exchange reserves
Devaluation
Revaluation 1. 2. 3. 4. 5.

19. Exchange Rate Regimes
Governments / central banks can influence their country’s exchange rate
Fixed exchange rates
Floating exchange rates

20. Fixing Exchange Rates

21. Fixed Exchange Rates
Pros
Cons

22. Exchange Rates & Macroeconomic Policy
Adopting a fixed exchange rate or an international currency (such as the euro) takes away a country’s independence regarding monetary policy

23. Not-so-fixed exchange rates
Even countries that adopt fixed exchange rates often change their target rate

24. Floating Exchange Rates & Monetary Policy
Monetary policy used to solve domestic problems has a spillover effect on foreign exchange

25. Monetary Policy & the Exchange Rate

26. International Business Cycles
Supply or demand shocks in one country can lead to a change in X & M, affecting the economies of your trading partners

27. Module 44 Key Terms & Review Barriers to Trade
Protectionism
Tariff
Import quota 1. 2. 3. 4. 5.

28. The U.S. Ceramic Plate Market w/ Imports

29. A $3 Tariff on Ceramic Plates

30. A Ceramic Plates Quota of 2 million

31. Unit 8 Review (pgs ) 1. 2. 3. 4. 5. 6. 7. 8. 9.
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