Unit 06: Macro

AP Macroeconomics

balance of payment

an accounting system to keep track of transitions between countries over a period of time. Made of the Capital account (CA) and Capital and financial accounts (CFA)

CA:

newt exports, money transfers, investment income, net unilateral transfers

examples of CA transactions:

• trade between countries

• income from assets owned in a another country

  • sending or receiving income from another countr

net exports:

trade balance = exports - imports

exports = credit imports

debit

surplus

Exports > imports

deficit

Imports > exportsw

what is something important to note about the trade deficit?

when a country has a trade deficit, it does NOT necessarily have a deficit in the current account

CFA?

BOP for assest b/2 countries

-financial asset transfers

what transactions are unders CFA

• purchase/sale of CD’s, bonds, other interest bearing assets

• foreign exchange market transactions

• purchase/sale of physical assets

  • foreign direct investment

Financial capital inflow

financial capital going intoa n economy = surplus

financial capital outflow

Financial capital going out of an economy = deficit

credit

money in

debit

money out

how are debit and credit related?

the sum of credit entries should match the sum of all debits

how are CF and CFA related?

inversely

• an inc in CF results in a dec in CFA and VV since CA + CFA = 0

exchange rate:

the price of one currency in terms of another

-relative values so when one goes up the other goes down

Currency appreciation:

when a currency becomes more valuable in terms of other currencies (can buy more thingies)

currency depreciation

a currency becomes less valuable in terms of other currencies (you can buy less thingies ☹)

Value of exchange rates

in order for any transaction to occur between different countries, currencies must be exchanges

Foreign Exchange Market?

• interaction of buyers and sellers exchanging the currency of one country for the currency of another

• determines the equil exchange rate in a flexible exchange market and influences the flow of goos, services, and financial capital between countries

• Y: R/D (currency on x) X: quantity of currency

determinants of currency supply/demand?

• demand for a country’s exports or imports within in the country

• interest rate changes affect both the suppl and demand for currencies

  • expectation of future exchange rates

Demand shifter for the FXM?

• foreign demand for goods and services

• foreign demand for the country’s assets

  • fiscal and monetary policy

Shifters of supply in FXM:

• trade in a market

• domestic demand for another country’s goods and services, assets as well

• protectionist policies (tariffs, quotas) imposed on other country’s goods and services

∆ in the FXM and net exports?

-realative price of good change can cause changes in net exports

• fluctuating currency values cause changes in the relative price of goods

Capital inflow (effect on supply)

supply of loanable funds, shifts right

capital outflow (flight)

supply shifts left

what drives the change in capital flow

interest rate

what causes the interest rate to shift?

• monetary policy

• demand for money

• budget balance

  • household savings

Monetary policy effect on IR

Expan = dec

Cont = inc

Demand for money effect on IR

inc :" rate inc

dec: rate dec

Budget balance effect on IR

deficit: inc rates

surplus: rates dec

household savings affect on IR?

Increase: dec rates

Decrease: in rates

what direction does Financial capital seek?

the highest return available (high IR)