AP Econ Unit 6

net exports

exports-imports

trade surplus

exporting more than is imported

trade deficit

exporting less than is imported

the BOP

• considers ALL international transactions

• is a summary of a country’s international trade

• BOP summary is within a given year prepared in the domestic country’s currancy

  • ex: if accounting BOP of US it would be in dollars

current account

the transactions of a country’s payments to foreign investors & other monetary transfers

what makes up the current account

1. trades in goods & services

2. investment income - income from factors of production

3. net transfers - $ from public or private sectors ex: donations, remittance, aids & grants, official assistance ect

capital financial account

measures the purchase & sale of financial assets abroad

• purchase of things that continue to earn money

net capital outflow

difference btwn the purchase of foreign assets & domestic assets purchased by foreigners

financial account surplus

inflow > outflow

financial account deficit

inflow < outflow

balance of payments

current account & capital and financial account must balance out if one has a deficit the other must have a surplus

CA=-CFA

why do CA and CFA balance out

• money that leaves a country must come back as either foreign purchases of goods/services or foreign purchases of financial assets

BOP & the exchange rate

• for all international transactions there are different national currencies

• each country must be paid in their own currency

  • importers must buy the currency of the exporting nation

exchange rate in FOREX market

• only look at 2 countries/currencies at a time

• examine the price of one currency in terms of the other currency

• the exchange rate depends on which currency you are converting

depreciation

the loss of value of a country’s currency with respect to a foreign currency (“weaker” currency)

appreciation

the increase of value of a country’s currency with respect to a foreign currency (“stronger” currency)

FOREX Market graph

FOREX Shifters

1. changes in tastes

   1. ex: british tourists flock to US D for USD increases S for British pounds increases

2. changes in relative incomes

   1. results in more imports/exports

   2. ex: US growth → increased US incomes → US buys more imports → S of USD increases

3. changes in relative price level

   1. resulting in more imports

   2. ex: US prices increase relative to Britian… US demand for cheaper imports increases → demand for pounds increases → supply of USD increases

4. changes in relative interest rates

   1. ex: US has higher IR than Britain… British ppl want to put money in US banks → capital flows to us increase → D for USD increases → British supply more pounds

which FOREX shifters are 2x shifters

inflation rates and interest rates

• if inflation increases OR interest rate decreases then Supply will increase and demand will decrease

types of trade restrictions

• tariff

• quota

tariff

a tax on imports

quota

a limit on the quantity of imports

exchange rate regimes:

• fixed exchange rate

  • some govs attempt to depreciate their country’s currency to increase exports

• floating exchange rate

fixed exchange rate

the gov actively manages the country’s currency

if depreciating…

• buy its own currency in the forex market

• shift S and D curves by changing monetary policy

  • IR up → more investments more demand for the currency

• reduce supply of currency to FOREX market

  • restricting who can buy other currencies

If appreciating…

same in reverse

floating exchange rate

the market determines the value of the country’s currency