Please enable JavaScript.
Coggle requires JavaScript to display documents.
Exchange Rates and balance of payment - Coggle Diagram
Exchange Rates and balance of payment
Exchange Rate
value of one currency expressed in terms of another country
Floating
-The government or central bank maintains the currency's value at a specific level relative to another currency (e.g., the U.S. dollar) or a basket of currencies.
Appreciation
an increase in the value of a currency in the context of a floating exchange rate system
Depreciation
a decrease in the value of a currency in the context of a floating exchange rate system
Factors that affect currency demand (Inflows of funds)
Increase
in currency
demand
leads to
appreciation
(D curve shifts right)
Increase in foreign demand for exports of goods and services.
Lower inflation leading to increase in foreign demand for exports.
High growth rates of trading partners leading to increase in foreign demand for exports.
Increase in inward investment.
Higher interest rates leading to more inward financial investment.
1 more item...
Decrease
in currency
demand
leads to
depreciation
(D curve shifts left)
Decrease in foreign demand for exports of goods and services.
Higher inflation leading to decrease in foreign demand for exports.
Low growth rates of trading partners leading to decrease in foreign demand for exports.
Decrease in inward investment.
Lower interest rates leading to less inward financial investment.
1 more item...
Factors that affect currency supply (Outflows of funds)
Decrease
in currency
supply
leads to
appreciation
(S curve shifts left)
Decrease in domestic demand for imports of goods and services.
Lower inflation leading to decrease in domestic demand for imports
Low domestic growth rate leading to decrease in domestic demand for imports.
Decrease in outward investment.
Higher interest rates leading to less financial investment by domestic residents in foreign countries.
1 more item...
Increase
in currency
supply
leads to
depreciation
(S curve shifts right)
Increase in domestic demand for imports of goods and services.
Higher inflation leading to increase in domestic demand for imports.
High domestic growth rate leading to increase in domestic demand for imports.
Increase in outward investment.
Lower interest rates leading to more financial investment by domestic residents in foreign countries.
1 more item...
consequences of change in exchange rates
effects on:
rates of inflation
demand-pull inflation
affect by AD by influencing net exports
currency depreciation, by making export cheaper and import expensive
increase quantity export, lower quantity import, Increase net export
AD increase, AD shift to the right
in recession,
AD not cause demand-pull inflation
only if the economy produce at or close to potential output -> result in excess aggregate demand
currency appreciation will reduce demand-pull inflation (decrease in net export)
cost-push inflation
currency depreciation makes import expensive
If domestic producer is heavily dependent on imported factors of production
the cost of production increase, price increase
SRAS decrease, SRAS shift to the left
currency appreciation, import less expensive, SRAS shift to the right
Lowering inflationary pressure,
Lower cost-push inflation
economic growth
unemployment
current account balance
foreign debt
living of standard
fixed
The currency's value is determined by supply and demand in the foreign exchange market.
revaluation
increase in the value of a currency in the context of a fixed or pegged exchange rate system
devaluation
decrease in the value of a currency in the context of a fixed or pegged exchange rate system
The intervention to maintain fixed exchange rates
using official reserves
increase in interest rate
Borrowing from abroad
efforts to limit imports
managed
free to float to their market levels over a long period of time, however, central bank periodically intervene to maintain stability
overvalued
currency whose value
higher
than its free market value and may occur in fixed or managed exchange rate system
undervalued
currency whose value
lower
than its free market value and may occur in fixed or managed exchange rate system
BOP
Definition: a country record of all transactions between the residents of all countries
credit (+ve)
Payment receive from other countries
debit (-ve)
payment made to other countries
Credit > Debit - Surplus
Debit > Credit - Deficit
Current Account
Credit
A- Export goods
B- Export Services
c- Investment income enter country
D- Unilateral transfer of funds into the country
Debit
E- Import of goods
f- Import of services
G- investment income leaving country
H- Unilateral transfer of funds leaving the country
Capital Account
Credit
I- Capital Transfer into country
Debit
J- Capital Transfer out of the country
Financial Account
Credit
K- Investment income entering the country
M- Reserve assets decrease
Official borrowing
Debit
L- Investment income leaving the country
N- Reserve assets increase
Current account = Capital account + Financial Account + (Net errors + omissions)
