AP Macro Unit 6.1-6.3- AP Classroom Summarized

Unit 6.1

  • Balance of Payments (BOP) accounts summarize the country’s transactions with other countries within a period.

    • Made of Current Account and Current Financial Account

  • CA (Current Account):

    • Made of net exports, money transfers, investment income, and net unilateral transfers.

      • Net Exports (Trade income) = Exports- Imports

    • Purchase or sale of goods.

    • Earning income from assets owned by another country.

    • Sending and receiving money from one country to another.

    • Not always balanced.

    • Exports = Credit

    • Imports = Debit

    • Exports > Imports = Trade Surplus

    • Exports < Imports = Trade Deficit

    • If there is a trade deficit, it doesn’t mean the CA is in a deficit.

  • Capital and Financial Account:

    • Balance of payments between countries.

    • Financial Capital Transfers.

    • Purchase and sale of physical assets.

  • Every time there is a transfer of money between countries, we have to decide where this transaction is counted for.

Not always balanced.

Debit vs Credit:

  • Money in is credit, and money out is debit.

  • For example, when a citizen of the United States makes a payment to Country R, the USA has a debit and Country R has a credit.

  • The sum of all our credits should match the sum of all debit entries.

  • If there is an increase in the Current Accounts, there must be an offset of a decrease in the Capital and Financial Accounts.

    • Goes the other way as well.

  • CA + CFA = 0

6.2: Exchange Rates

  • Price of a currency in terms of another.

  • Example: The exchange rate between the US dollar and the Euro indicates how many Euros can be obtained with one dollar.

  • When one currency becomes more valuable, it appreciates.

    • When you can buy 5 euros for 1 buck instead of 2 euros.

6.3: Foreign Exchange Market

  • The interaction of buyers and sellers for the exchange of one currency for another.

  • This market plays a crucial role in determining exchange rates, which can be influenced by factors such as interest rates, inflation, and overall economic stability.

  • Surplus: Quantity supplied is greater than quantity demanded.

  • Deficit: Quantity supplied is less than quantity demanded.

  • The goal is equilibrium.

  • Determinants of Demand:

    • Demand for a country’s exports or imports within the country.

    • Interest rate changes affect both the supply and demand for currencies.

    • Expectations of the future.