U6 FOREX megaset

Trade Surplus

exports > imports

Trade deficit

imports > exports

aka trade gap

US since 1975

balance of payments

considers all international transactions w/n given year using the domestic country’s currency

2 accounts

1. Current Account (CA)

2. Capital & Financial Account (CFA)

3. (Official Reserves Account)

CA

one time purchases/payments

not always balanced to zero

1. Trades in G&S (XN)

2. Investment Income

3. Net Money Transfers

Trades in G&S (XN)

Difference b/w nation’s exports and imports of g&s

Investment Income

income made from factors of production including payments made to foreign investors

ex. money earned by JP car producers in US

Net money transfers

money flows from private or public sectors

ex. donations, aids, grants, cash

CFA

puchases/payments w/ intention of making money in future

measures purchase and sale of financial assets abroad

not always balanced to zero

1. Real investment purchase

2. Financial Capital invesment

real investment purchase

purchase of things that continue to earn money

ex. factories, gov bonds, usually real estate

Financial capital investments

difference between purchase of foreign assets and domestic assets purchased by foreigners

ex. stocks, bonds

1. acct SURPLUS = INFLOW = money come in (USA)

2. acct DEFICIT = OUTFLOW = money go out

Credit

money coming in (exports)

Debit

money flowing out (imports)

Why CA & CFA cancel out to zero

countries tend to financially invest in each other (ex. China & US)

CA + CFA = 0

if one has deficit, other must have surplus

exch rate

price of one currency relative to another currency

currency in exp/imp

each country is paid in their own currency

buyer (importer) must exchange their currency for the seller’s (exporter)

depreciation

loss of value of a country’s curency relative to a foreign currency

• more units of dollar needed to buy single unit of other currency

• dollar is weaker

appreciation

increase of value of country’s currency relative to a foreign currency

• less units of dollar needed to buy single unit of other currency

• dollar is stronger

Forex market graph parts

x = Quantity of currency

y = Exch rate (other/home)

S & D lines

Demand

foreigners demand dollars

INVERSE relationship b/w exch rate (price) and quantity demanded

Supply

americans supply dollars

DIRECT rela. b/w exch rate (price) and quantity supplied

Disequilibriums

1. Shortage - price is LOWER than equilibrium

2. Surplus - price is HIGHER than equilibrium

4 FOREX shifters

1. changes in TASTES

2. changes in INCOME

3. changes in relative PRICE LEVEL (infl.) ***

4. changes in relative INTEREST RATES ***

changes in tastes

ex. more BR tourists come to US

• US $ demand incr → APPRECIATES

• BR $ supply incr → DEPRECIATES

changes in income

ex. US income incr, US imports more

• BR $ demand incr → APPRECIATES

• US $ supply incr → DEPRECIATES

changes in relative PRICE LEVEL

ex. US price lvl incr

• BR $ demand incr → APPRECIATES

• US $ supply incr → DEPRECIATES

THEN (db shift)

• US $ demand decr

• BR $ supply decr

changes in relative INTEREST RATES

ex. US high interest rates

• US $ demand incr → APPRECIATES

• BR $ supply incr → DEPRECIATES

THEN (db shift)

• BR $ demand decr

• US $ supply decr

exch rate regimes`

1. fixed exch rate

2. floating exch rate

fixed exch rate

gov actively manages currency

some govs intentionally depreciate currency to promote exports

floating exch rate

market determines value of currency

net exports vs app/depr.

appreciation = XN decr

depreciation = XN incr

RiR and Intl. capital flows

rela. b/w Loanable Funds graph and FOREX graphs

capital flow either INflow or OUTflow

RiR decrease

(db shift) = capital OUTflow = $ demand decr = $ depreciates

RiR increase

(db shift) = capital INflow = $ demand incr = $ appreciates