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Section 8- the open economy: International Trade and Finance (Mod 43-…
Section 8- the open economy: International Trade and Finance
Mod 41- Capital Flows
and the Balance of Payments
Balance of payments accounts
- a summary the country's transactions with other countries
Balance of payments on
1)
Current account
- BOP on goods/ services + international transfer payments, factor income 2)
Goods and Services
- the difference between the value of its exports/imports of goods 3)
Financial account
- difference between its sales/purchases of assets from foreigners during a given period
Balance of payments
Loanable funds model
Mod 42- The Foreign Exchange Market
currency is traded in the
foreign exchange market
and the prices at which currencies are known as
exchange rate
appreciates vs. depreciates
- when a currency becomes mire valuable compared to other currencies it appreciates, where as if it decreases it depreciates
Foreign Exchange Market diagram is at
equilibrium exchange rate
, which means that the quantity of a currency demanded equals the quantity supplied
real exchange rates
- exchange rates adjusted for international differences in aggregate price levels
Mod 43- Exchange Rate policy
and Macroeconomic Policy
Fixed vs. Floating Exchange Rates
- Government controls both. The rate can go wherever the market takes it when floating, and when its the same against some other currency @ or near a particular target
Government purchases or sales of currency in the foreign exchange market constitues
The Exchange Rate Intervention
Devaluation vs. Revaluation
- has to do with a reduction or increase in the value of a currency under a fixed exchange rate regime
Exchange Rate Regime
- is a rule governing policy towards the exchange rate
Monetary Policy and the Exchange rate graph is above minus the intervention
Mod 44- Barriers to Trade
Protectionism
- the practice of limiting trade to protect domestic industries
an example is
tariffs
, or taxes on imports
Import Quotas
- is a limit on the quantity of a good that can be imported within a given period
Mod. 45- Putting it all together
Structure for Macroeconomics Analysis 1) A starting point- to analyze any situation, you have to know where to start
2) A pivotal event- this might be a change in the economy or a policy response to the initial situation
3)Initial effects of the event- an event will generally have some initial, short-run effects
4)Secondary and long-run effects of the event- after the short-run effects run their course, there are typically secondary effects and the economy will move towards its long-run equilibrium
