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Open Economy Macroeconomics: The Balance of Payments and Exchange Rates
Open Economy Macroeconomics: The Balance of Payments and Exchange Rates
Open Economy Macroeconomics: The Balance of Payments and Exchange Rates
Open Economy
Macroeconomics: The
Balance of Payments and
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
United States Balance of Payments, 1999
CURRENT ACCOUNT
Goods exports 683.0
Goods imports 1,030.2
(1) Net export of goods 347.2
Export of services 277.1
Import of services 197.5
(2) Net export of services 79.6
Income received on investments 273.9
Income payments on investments 298.6
(3) Net investment income 24.7
(4) Net transfer payments 46.6
(5) Balance on current account (1 + 2 + 3 + 4) 338.9
CAPITAL ACCOUNT
(6) Change in private U.S. assets abroad (increase is ) 381.0
(7) Change in foreign private assets in the United States 706.2
(8) Change in U.S. government assets abroad (increase is ) 8.3
(9) Change in foreign government assets in the United States 44.5
(10) Balance on capital account (6 + 7 + 8 + 9) 378.0
(11) Statistical discrepancy 39.1
(12) Balance of payments (5 + 10 + 11) 0
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Balance of Payments
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The United States as a Debtor Nation
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Equilibrium Output (Income)
in an Open Economy
Planned aggregate expenditure in an
open economy equals:
A E C I G E X IM
C a bY In equilibrium:
Y C I G EX IM
I I0
Y a bY I G EX m Y
G G 0 Y bY m Y a I G EX
Y (1 b m ) a I G E X
EX EX 0
1
IM m Y Y*
1 b m
(a I G E X )
m = marginal propensity
multiplier autonomous expenditures
to import (MPM)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Equilibrium Output (Income)
in an Open Economy
a= 50 mulltiplier = 2.00
1200
b= 0.8 m= 0.25
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Import and Export Prices
and the Price Feedback Effect
When the export prices of one country
rise, with no change in the exchange rate,
the import prices of another rise.
If the inflation rate abroad is high, U.S.
import prices are likely to rise.
The price feedback effect is the process
by which a domestic price increase in one
country can feed back on itself through
export and import prices.
Inflation is exportable.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Open Economy with
Flexible Exchange Rates
Floating, or market-determined,
exchange rates are exchange rates
determined by the unregulated forces of
supply and demand.
Exchange rate movements have important
impacts on imports, exports, and
movement of capital between countries.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Market for Foreign Exchange
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Market for Foreign Exchange
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Factors that Affect Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Factors that Affect Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Factors that Affect Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Effects of Exchange Rates
on the Economy
A depreciation of a countrys currency can
serve as a stimulus to the economy.
Foreign buyers are likely to increase their
spending on U.S. goods
Buyers substitute U.S.-made goods for
imports
Aggregate expenditure on domestic output will
rise
Inventories will fall
GDP (Y) will increase.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates and the Balance of
Trade: The J Curve
According to the J curve, the balance of trade
gets worse before it gets better following a
currency depreciation.
Initially, the negative effect
on the price of imports may
dominate the positive effects
of an increase in exports
and a decrease in imports.
But when imports and exports
have had a time to respond to
price changes, the balance of
trade improves.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates and Prices
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Monetary Policy with
Flexible Exchange Rates
Fed actions to lower
interest rates result in a
decrease in the demand
for dollars and an increase
in the supply of dollars,
causing the dollar to
depreciate.