1. The Balance of Trade and Balance of Payments
What trade imbalances imply and and what they do not imply

2. Real exchange rates are determined by real economic events affecting supply and demand for the currencies

3. Balance of Payment Accounts Components:
Current Account - Goods and Services
Financial Account Investment
Reserve Account - Government Reserves

4. Why the Balance of Payment Balances
Definitions
Y = output
C = consumption
I = investment
S = savings
X = exports
M = imports

5. Why the BOP Balances (2) Definitions - national income accounts
Y = C + I + (X - M)
S = Y - C
Definitions - BOP accounts
Current Account = X - M
Capital Account = I - S

6. Why the BOP balances (3) S - I = Y - C - I = (X - M) Thus
definition of savings
definition national income accounts
Thus
0 = (X - M) + (I - S)
current account + capital account = 0

7. Because BOP must balance
Don’t just consider whether the current account is negative (= financial account is positive)
Think about the composition of the financial account
“hot money” v. long-term investments