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Losers [anyone buying with pesos] 1. Mexicans who buy American products 2. Mexican businesses that buy supplies from the U.S. 3. American businesses that.

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Presentation on theme: "Losers [anyone buying with pesos] 1. Mexicans who buy American products 2. Mexican businesses that buy supplies from the U.S. 3. American businesses that."— Presentation transcript:

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2 Losers [anyone buying with pesos] 1. Mexicans who buy American products 2. Mexican businesses that buy supplies from the U.S. 3. American businesses that sell products to Mexico 4. Mexican visitors to the U.S. 5. Those who primarily do business in pesos Winners [anyone buying with dollars] 1. American tourists to Mexico 2. People who send dollars to family or friends in Mexico 3. U.S. businesses that buy from Mexico 4. American consumers who buy Mexican imports 5. Those who primarily do business in dollars $1 = P3.5 $24,000 car = 84,000 pesos $1 = P13.0 $24,000 car = 312,000 pesos

3 2002 FRQ 2002 FRQ real interest rates [RIR] in the U.S. & Japan7% The real interest rates [RIR] in the U.S. & Japan are equal to 7% [say 9%-2%=7%]. real interest rate in the U.S. increases to 8%real interest rate in The real interest rate in the U.S. increases to 8% while the real interest rate in Japan decreases to 6%. financialcapital flows be affected a. How & why will financial capital flows be affected by this change in real interest rates? financial capitalnot real capital [financial capital, not real capital] graph for the yen b. Using a correctly labeled graph for the yen market market, show and explain how the value of the yen will change relative to the value of the dollar. c. Explain how the change in the value of the yen will affect each of the following in the U.S. Imports (1.) Imports from Japan Exports (2.) Exports to Japan 2002 AP Essay on Higher Interest Rates in the U.S. $1.15 $1.00 in A # of Yen # of Yen $/¥ D2D2D2D2 D1D1D1D1 S E2E2E2E2 E1E1E1E1 (D) [Nominal IR-Inflation = RIR]

4 1. Assume that the U.S. trades with Japan. Draw a correctly labeled graph of the foreign exchange market for the U.S. dollar. Lets say that United States output [GDP] decreases. Show & explain how the supply of the U.S. dollar will be affected in the foreign exchange market.. what will happen to the 2. Given your answer in 1, indicate what will happen to the value of the U.S. dollar relative to the Japanese yen value of the U.S. dollar relative to the Japanese yen. S1$S1$S1$S1$ D$D$D$D$ Quantity of Dollars E1E1E1E1 ¥/$ ¥100 S2$S2$S2$S2$ E2E2E2E2 ¥120 Answer 1: The decrease in real U.S. output will cause job losses in the U.S. and decrease the dollars supplied for Japanese goods. Answer 2: Due to the decrease in supply of U.S. dollars [as shown above], it will take more yen to purchase a dollar, depreciating the yen and therefore appreciating the dollar.

5 Other Strange Sounding Currencies Other Strange Sounding Currencies Indias RupeeBrazils Real Nicaraguas Cordoba Indonesias RupiahCosta Ricas Colon (100 centimos) Brazils RealGuatemalas Quetzal Laos KipZambias Kwacha Eritreas BirrCroatias Kuna Irans RialBotswanas Pula Spains PesetaVenezuelas Bolivar Kuwaits DinarBulgarias Lev (100 stotinki) Saudi Arabias RiyalChinas Renminbi Mongolias Tugrik (mongo)Russias ruble Gambias Dalasi (bututs)Ghanas Cedi Hungarys Forint (filler)Haitis Gourde S. Korean won (100 chon)Thailands Baht (100 satang) Afghanistans Afgani (puls) The Afghan note–10,000 Afghanis is worth 25 U.S. cents; or $1 = 40,000 Afghanis. The $ 25 million reward for Osami is worth 950 billion Afghanis. With a typical wage of $4 a month, the typical Afghan could live 500,000 years off the reward. 5Kuna [worth 25 cents] Kip

6 trillions of In Afghanistan, there are trillions of Afghan billslittle value Afghan bills but they have little value. burning much of the currency They are burning much of the currency and hope to shrink the currency notes from $15 trillion all the way down to $15 billion $15 trillion all the way down to $15 billion. almost worthless The Afghan has become diluted in value, almost worthless, overprinting and counterfeiting because of overprinting and counterfeiting. They are tossing old bills into an incinerators Afghans tossing old bills into an incinerators to make Afghans more scarce more scarce. [worth 12.5 cents] And why havent we bee able to find Osama ?

7 Increase in taste 1. Increase in taste [more demand for a countrys products or assets] Increase in interest rates 2. Increase in interest rates [Overseas investors increase their investments there.] Decrease in price level 3. Decrease in price level [overseas buyers want to buy our cheaper goods.] Decrease in growth rate 4. Decrease in growth rate [ A countrys declining economy results in them buying less from other countries; decreasing demand for their currency and thus appreciating the declining economys currency] 5. Decrease in the price of a currency relative to the other

8 (50%) Mexico increases their investments in the U.S.,supply of Mexican (50%) 1. If Mexico increases their investments in the U.S., the supply of Mexican pesosto the foreign exchange marketdollar price of the peso pesos to the foreign exchange market and the dollar price of the peso will most likely change in which of the following ways? Supply of PesosDollar Price of Peso a. increaseincrease b. increasedecrease c. decreaseincrease d. decrease decrease e. decreasenot change (41%) real interest rate in Canada increases (41%) 2. If the real interest rate in Canada increases relative to the real interest rate for in Japan and there are no trade barriers between the two countries, then for Canada, which of the following will be truefinancial capitalvalue Canada, which of the following will be true of its financial capital, the value of its currencyits exports of its currency, and its exports? Capital FlowCurrencyExports a. InflowAppreciationIncrease b. InflowAppreciationDecrease c. InflowDepreciationIncrease d. OutflowDepreciationIncrease e. OutflowAppreciationDecrease The higher real IR in Canada would attract more financial inflows capital inflows from overseas, appreciating appreciating the Canadian decreasing its dollar, and decreasing its exports exports because they are now more expensive. peso As pesos are exchanged for dollars, peso supply increase supply increase in depository institutions. There is an increase in demand for the decreasing the dollar and it appreciates, decreasing the dollar price of the peso dollar price of the peso. physical capital chases lower interest rates financial capital 'chases' higher interest rates Remember that physical capital chases lower interest rates and financial capital 'chases' higher interest rates.

9 (51%) increase in investment demand in the U.S.real interest rate (51%) 3. With an increase in investment demand in the U.S. the real interest rate riseschange in the capital stock in the U.S. rises. In this situation, the most likely change in the capital stock in the U.S. international value of the dollar and in the international value of the dollar would be which of the following? Capital Stock inInternational Value United Statesof the Dollar United Statesof the Dollar a. IncreaseDecrease b. IncreaseNo change c. IncreaseIncrease d. DecreaseIncrease e. No changeDecrease (64%) cause the U.S. dollar to (64%) 4. Which of the following would cause the U.S. dollar to increase in value increase in value compared to the Japanese yen? a. An increase in the money supply in the U.S. b. An increase in interest rates in the U.S. c. An increase in the U.S. trade deficit with Japan d. The U.S. purchase of gold on the open market e. The sale of $2 billion dollars worth of Japanese television sets to the U.S. (71%) why many U.S. economists support (71%) 5. Which of the following best explains why many U.S. economists support free trade free trade? a. Workers who lose their jobs can collect unemployment compensation. b. It is more important to reduce world inflation than to reduce U.S. unemployment. c. Workers are not affected; only business suffer. d. The long-run gains to consumers & some producers exceed the losses to other producers. e. Government can protect U.S. industries while encouraging free trade. More real investment would result in an increase in real capital stock in the U.S. The increase in the real interest rate would increase financial investment demand for the dollar as it appreciates for the dollar as it appreciates.

10 Appreciation/Depreciation Practice Japan buys 10 million iPhones 1. If Japan buys 10 million iPhones dollar our the dollar would (appr/depr) and our imports from Japan imports from Japan would (incr/decr). U.S. in. rates are increasing faster 2. If U.S. in. rates are increasing faster dollar than Japans, the dollar would (appr/depr) our exports and our exports would (increase/decrease). prices are dropping more in Japan 3. If prices are dropping more in Japan yen than in the U.S., the yen will (appr/depr) Japans imports and Japans imports will (increase/decrease). U.S. growth rate is faster than that of Japan 4. If the U.S. growth rate is faster than that of Japan, dollarU.S. the dollar will (appreciate/depreciate) and U.S. imports imports from Japan will (increase/decrease). dollar price of the yen decreases 5. If the dollar price of the yen decreases, the dollarour dollar has (appreciated/depreciated) and our imports imports from Japan will (increase/decrease).

11 Appreciation/Depreciation Practice [continued] Russia sells 10 bil. worth of oil to the 6. If Russia sells 10 bil. worth of oil to the U.S.rubletheir U.S. the ruble would (appr/depr) and their imports from the U.S. imports from the U.S. would (incr/decr). U.S. in. rates are decreasing faster 7. If U.S. in. rates are decreasing faster here dollar than in Canada, the dollar would (appreciate/ U.S. exports depreciate) & U.S. exports would (incr/decr). prices are increasing more in Japan 8. If prices are increasing more in Japan dollar than in the U.S., the dollar will (appr/depr) our exports and our exports will ( increase /decrease). U.S. growth rate is slower than that of Canada 9. If the U.S. growth rate is slower than that of Canada, Canadian dollarCanadas the Canadian dollar will (appreciate/depreciate) & Canadas exports exports to the U.S. will (increase/decrease). dollar price of the euro increases 10. If the dollar price of the euro increases, the dollarour dollar has (appreciated/depreciated) and our our imports imports from France will (increase/decrease).

12 Malaysias price level is decreasing faster than that of Brazil 4. If Malaysias price level is decreasing faster than that of Brazil, Malaysian ringgitMalaysias exports the Malaysian ringgit will (apprec/deprec) & Malaysias exports to Brazil to Brazil will (increase/decrease). growth rate is less rapid in Djibouti 5. If growth rate is less rapid in Djibouti than in Swaziland, Djibouti bouti then the Djibouti bouti will (appreciate/depreciate) and Djiboutis exports Djiboutis exports will (increase/decrease). Euro price of the S. Korean won decreasesEuro 6. If the Euro price of the S. Korean won decreases, the Euro has European exports to Korea (apprec/deprec) & European exports to Korea will (incr/decr). interest rates are increasing faster in Zambia 7. If interest rates are increasing faster in Zambia than in Spain, Zambian KwachiZambias the Zambian Kwachi will (appreciate /depreciate) and Zambias imports from Spain imports from Spain will (increase/decrease). more Thai bahts are required to buy a dollar 1. If more Thai bahts are required to buy a dollar, baht then the baht has (appreciated/depreciated), & Thai exports to the U.S. Thai exports to the U.S. should (increase/decrease). L atvias demand for U.S. iF uzzy iW uzzies decrease 2. If L atvias demand for U.S. iF uzzy iW uzzies decrease, Latvias Lat Latvias then Latvias Lat will (apprec/deprec) & Latvias imports imports from the U.S. will (increase/decrease). in. rates are decreasing faster in S.Korea [4 % ] 3. If in. rates are decreasing faster in S.Korea [4 % ] Korean won than in Cuba[8%], the Korean won will (appr/depr) Koreas exports to Cuba & Koreas exports to Cuba will (increase/decrease ).

13 Korea buys 2 million fewer American autos 1. If Korea buys 2 million fewer American autos dollarour the dollar would (appreciate/depreciate) & our exports to Korea exports to Korea would (increase/decrease). U.S. interest rates decrease faster 2. If U.S. interest rates decrease faster than dollar Haitis, the dollar would (appreciate/depreciate) & our imports our imports would (increase/decrease). prices are dropping more in Mexico 3. If prices are dropping more in Mexico than peso in the U.S., the peso will (appreciate/ depreciate ) Mexicos exports and Mexicos exports will (increase/decrease). U.S. growth rate is faster than that 4. If the U.S. growth rate is faster than that of ChinadollarU.S. of China, the dollar will (appreciate/depreciate) and U.S. exports to China exports to China will (increase/decrease). dollar price of the renminbi increases 5. If the dollar price of the renminbi increases, the dollarour imports dollar has (appreciated/depreciated) and our imports from China from China will (increase/decrease). Zimbabwe wants tobuy 3 million American iFuzzy iWuzzys 6. If Zimbabwe wants to buy 3 million American iFuzzy iWuzzys, dollarour imports from the dollar (appreciates/depreciates) and our imports from Zimbabwe Zimbabwe should (increase/decrease). bouti price of the dollar increasesbouti 7. If the bouti price of the dollar increases the bouti will their exports (appreciate/depreciate ) and their exports will (increase/decrease).

14 Djibouti buys 4 mil. more U.S. i Fuzzy iW uzzies 1. If Djibouti buys 4 mil. more U.S. i Fuzzy iW uzzies dollar our the dollar would (appreciate/depreciate) & our exports to Djibouti exports to Djibouti would (increase/decrease). U.S. interest rates are increasing f aster 2. If U.S. interest rates are increasing f aster dollar than Cubas, the dollar would (appr/depr) & our imports our imports from Cuba would (incr/decr). prices are increasing more in Canada 3. If prices are increasing more in Canada than Canadian l oonie in the U.S., the Canadian l oonie will (appr/depr) Canadas exports and Canadas exports will (increase/decrease). U.S. growth rate is slower than that 4. If the U.S. growth rate is slower than that of ChinadollarU.S. of China, the dollar will (appreciate/depreciate) and U.S. exports exports to China will (increase/decrease). dollar price of the renminbi decreases 5. If the dollar price of the renminbi decreases, the dollarour dollar has (appreciated/depreciated) and our imports imports from China will (increase/decrease). Congo wants to buy 2 million American iPiggy iWiggies 6. If the Congo wants to buy 2 million American iPiggy iWiggies, dollarour imports from the dollar (appreciates/depreciates) and our imports from the Congo the Congo should (increase/decrease). euro price of the dollar decreaseseuro 7. If the euro price of the dollar decreases the euro will their exports (appreciate/depreciate ) and their exports will (increase/decrease).

15 inflows outflowsMeasure of money inflows and outflows between the U.S. and the Rest of the World (ROW). CREDITS –Inflows are referred to as CREDITS DEBITS –Outflows are referred to as DEBITS Balance of Payments 3 accountsBalance of Payments is divided into 3 accounts. –Current Account the three nets –Current Account – transactions that involve the three nets, net exports, net investment and net transfers –Capital/Financial Capitalnet debt forgivenessFinancial net purchases of real and financial assets –Capital/Financial Account [Capital Account is net debt forgiveness and Financial Account is net purchases of real and financial assets] –Official Reserves Account –Official Reserves Account – net foreign currency [foreign currency holdings of the Fed]

16 recorded twiceEvery transaction in the balance of payments is recorded twice in accordance with standard accounting practice. John Deereexports $50 million –Ex. U.S. manufacturer, John Deere, exports $50 million worth of farm equipment to Ireland. credit of $50 millionA credit of $50 million to the current account. ( - $50 million worth of farm equipment or physical assets). debit of $50 millionA debit of $50 million to the capital/financial account. ( + $50 million worth of Euros or financial assets). the two transactions offset each other balance of payments should all ways equal zero…Theoretically –Notice that the two transactions offset each other. Theoretically, the balance of payments should all ways equal zero…Theoretically IN OUT

17 worry about the 1 st half of the transaction export of farm equipment as a credit (inflow of dollars)Lucky for you, in AP Macroeconomics we only worry about the 1 st half of the transaction. We simplify and see the export of farm equipment as a credit (inflow of dollars) to the current account. Why then, did I mention double entry bookkeeping? current account andcapital/financial account are intrinsically linked together and balance each other –To help you understand that the current account and capital/financial account are intrinsically linked together and help balance each other? –Yes, thats it! IN OUT

18 Net Exports or Balance of TradeNet Exports or Balance of Trade –Exports of Goods/Services – Import of Goods/Services –Exportscredit –Exports create a credit to the balance of payments –Importsdebit –Imports create a debit to the balance of payments N et I nvestment I ncome [Interest, dividend, rent & profit income]N et I nvestment I ncome [Interest, dividend, rent & profit income] minus –Interest, dividend, and profit income earned by Americans abroad minus the same income paid to foreigners. minus –Ex. P ayments to A merican b asketball players p laying for E uropean teams minus payments to M anu Ginobli, Yao Ming, P au Gasol, S teve N ash and Dirk playing in the U.S. Net Transfers –Foreign aid, pensions, money sent back home, etc. –Ex. Mexican migrant workers send money to family in Mexico. [Mexican workers send $24 billion back to Mexico.] Capital Accountdebt forgivenessFinancial Account Capital Account [net debt forgiveness] & Financial Account [foreign p urchase real & financial assetsforeign real & financial assets of U.S. real & financial assets & U.S. purchase of foreign real & financial assets.] MVP

19 Balance of PaymentsBalance of Payments – sum of all the transactions that take place between U.S. residents and the residents of all foreign nations. Current Account, Capital/ Financial Account, and the Official Reserves.There are three components: the Current Account, the Capital/ Financial Account, and the Official Reserves. Current Accountfour thingsThe Current Account includes [3 nets] four things : Goods1. Goods [balance on goods (merchandise)] Services2. Services [balance on goods and services] Net investment3. Net investment income [interest, dividend, & profit income] Net transfers4. Net transfers [foreign aid, pensions, money sent back home, etc.] Capital and Financial Accountthree itemsThe Capital and Financial Account includes three items : Balance on capital accountdebt forgiveness1. Balance on capital account [net debt forgiveness] Foreign purchases of U.S. assets2. Foreign purchases of U.S. assets [real or financial] in U.S. U.S. purchases of foreign assets3. U.S. purchases of foreign assets [real or financial] abroad. difference between these two accounts balance of payments.The difference between these two accounts is the balance of payments. should balanceThey should balance. official reserves will be used to balance themIf not, official reserves will be used to balance them. export[a + here means we will export a stock of foreign money ($s will enter the U.S.)] – import[a – here means we will import a stock of foreign money ($s will exit the U.S.)] Net Exports FinancialAccount

20 parachuteCurrent Account parachute factory Capital Account [If you bought a parachute from a factory in Germany–Current Account] [If you bought a parachute factory in Germany – capital investment, so Capital Account ] Current Account [trade in currently produced goods, svcs, net investment & transfers] goods exports (1) U.S. goods exports……………………………………………$+1,046 goods imports (2) U.S. goods imports………………………………………..…... -1,563 goodsvisibles$-517 (3) Balance on goods [visibles]………..…………………………………………..$-517 exports of services (4) U.S. exports of services [shipping, insur., tourists, bank.] +509 imports of services (5) U.S. imports of services…………………………………..…… services [invisibles]+ 138 (6) Balance on services [invisibles]……………………… goods and services-737 (7) Balance on goods and services…………………………………….………… Net investment (8) Net investment income (income earned for svc of exported capital [money] [Profits received from overseas investment (interest, dividends, and rents)] ……………………………………………………………………… + 89 Net transfers (9) Net transfers (gifts given to the indivs, foreign aid, pensions, etc.)…… Balance on current account-420 (10) Balance on current account………………………………………………… Capital Accountdebt forgiveness Capital Account [a net account that mainly measures debt forgiveness] (11) Balance on capital account ………………………………..………………… Financial Account Financial Account [buying/selling of physical & financial assets (stock/bonds)] Foreign purchases of assets (12) Foreign purchases of assets in the U.S. ………………… U.S. purchases of assets abroad (12) U.S. purchases of assets abroad……………….…………… -125 Balance on financial account+423 (13) Balance on financial account…………………………………………….… (14) Balance on capital and financial account………………………………….+420 $0 $0 $0

21 _____ 1. Joe buys $30,000 worth of stock from Koreas Hyundai. _____ 2. France buys bombers and machine guns manufactured in N. Carolina. _____ 3. Toyota builds a Tundra manufacturing plant in San Antonio, TX. _____ 4. An American purchases a Japanese made Toyota Prius. _____ 5. Boeing sells a new 787 to France. _____ 6. An ARAMCO employee working in Saudi Arabia sends most of his pay to his family in Plano, TX. _____ 7. Americans donate $100 million in earthquake relief to Chinese relief organizations. _____ 8. The U.S. exports 50 tons of steel to Ireland. _____ 9. Ford buys three manufacturing plants in Taiwan. _____ 10. Japanese banks purchase U.S. Treasury Bonds. Current Account - something is physically transferred to another country. Capital/Financial Acct – nothing is physically transferred but ownership of the real [land/factory] or financial asset [stocks/bonds]. the real [land/factory] or financial asset [stocks/bonds]. Cap/Finan. Cur.Acct Cap/Finan. Cur.Acct Cur.Acct Cur.Acct Cur.Acct Cur.Acct Cap/Finan. Cap/Finan.

22 (16%) a country has a current account deficit (16%) 7. If a country has a current account deficit, which of the following must be true? a. It must also show a deficit in its capital/financial account. b. It must show a surplus in its capital/financial account. c. It must increase the purchases of foreign goods and services. d. It must increase the domestic interest rates on its bonds. e. It must limit the flow of foreign capital investment. Capital/Financial Acct Current=Short term Capital=Long term Current AcctCapital/Financial Acct Current Acct+Capital/Financial Acct = 0

23 2. Balance of payments accounts record all of a countrys international transactions during a year. (a)Two major subaccounts in the balance of payments accounts are the current account and the capital/financial account. In which of these subaccounts will each of the following transactions be recorded? (i) A United States resident buys chocolate from Belgium. (b) How would an increase in the real income in the United States affect the United States current account balance? Explain. (ii) A United States manufacturer buys computer equipment from Japan. Answer to 2. (a) (i): Answer to 2. (a) (i): Chocolate from Belgium would go in the current account as it includes the import of goods. Chocolate from Belgium would go in the current account as it includes the import of goods. Answer to 2. (a) (ii): Answer to 2. (a) (ii): Computer equipment by a U.S. manufacturer would also be classified as an import so it would also go on the current account. Computer equipment by a U.S. manufacturer would also be classified as an import so it would also go on the current account. Answer to 2. (b): Answer to 2. (b): An increase in real income would make U.S. citizens richer. We would buy more imports, An increase in real income would make U.S. citizens richer. We would buy more imports, decreasing net exports, and increasing the deficit on the current account. decreasing net exports, and increasing the deficit on the current account. 1 pt – current account 2 pts - 1 pt – imports increase or Xn decrease. 1 pt – current account balance decreases or current account balance goes into deficit. 1 pt – current account balance decreases or current account balance goes into deficit.

24 U.S. Goods export………………….…….…..+$100 U.S. Goods imports…………………………… U.S. Service exports………………………… U.S. Service imports………………………….…-90 Net Investment income………………..……….+20 Net transfers………………………………….…..-15 Balance on capital account …………………….-5 Foreign purchase of assets in the U.S………+45 U.S. purchases of assets abroad……………..-10 Official Reserves………………………………… T he U.S. is experiencing a balance on goods (deficit/surplus) of ($10/$20/$30 ) billion. 2. The U.S.s balance on goods & services is a (deficit/surplus) of ($30/$40) billion. 3. T he U.S.s balance on the current account is a (deficit/surplus) of ($25/$35). 4. The balance on the capital and financial account is a (surplus/deficit) of ($25/$30/$40). 5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5. [dont include official reserves here] 6. The official reserves account indicates the U.S. (imported/exported) $5 billion of its stock of foreign reserves. + export [A + here means we will export a stock of foreign money ($s will enter U.S.)] – import [A – here means we will import a stock of foreign money ($s will exit U.S.)]

25 1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30 ). 2. T he U.S.s balance on goods & services is a (deficit/surplus) of ($30/$40) bil. 3. The U.S.s balance on the current account is a (deficit/surplus) of ($25/$35). 4. The balance on the capital and financial account is a (surplus/deficit) of ($25/$30/$40). 5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5. [dont include official reserves here] 6. The official reserves account indicates the U.S. (imported/exported) $5 billion of its stock of foreign reserves. + export [A + here means we will export a stock of foreign money ($s will enter U.S.)] – import [A – here means we will import a stock of foreign money ($s will exit U.S.)] U.S. Goods export………………….…….…..+$100 U.S. Goods imports…………………………… U.S. Service exports………………………… U.S. Service imports………………………….…-90 Net Investment income………………..……….+20 Net transfers………………………………….…..-15 Balance on capital account …………………….-5 Foreign purchases of assets in the U.S…… +45 U.S. purchases of assets abroad…………… -10 Official Reserves…………………………………. -5 $20 -$30 G/S Current Account - $25 $30 Balance on Goods Bal. on Curr. Acct. Balance on Cap. & Financial Acct. - $ 50 $5 $5 Balance of Payments

26 A nswer the next 8 questions[33-40] 33. The balance on goods is a (deficit/surplus) of ($25/$30/$40) billion. 34. The balance on goods and services is a (deficit/surplus) of ($25/$45/$55) billion 35. The balance on the current account is a (deficit/surplus) of ($20/$25/$30) billion. 36. The balance on the capital account is a (deficit/surplus) of ($10/$20/$30) billion. 37. This country is experiencing a balance of payment (surplus/deficit) of ($10/$20).[Do not include official reserves] 38. The official reserves account indicates this country (imported/exported) $10 billion of its stock of foreign reserves. 39. If the foreign purchases of U.S. assets had been +$45 instead of +$30, then this country would have to (import/export) a $5 billion stock of foreign currency & official reserves would read (-$5/+$5). 40. The current account, capital account, & official reserves must always net to (0/50/100). Goods exports……….………………..+$45 Goods imports….………………………-$75 Service exports……………………….+$15 Service imports………………………..-$10 Net investment income……………..-$10 Net Transfers………………………… +$15 Balance on capital account…………. -$5 Foreign purchases of U.S. Assets..+$30 U.S. purchases of assets abroad… -$15 Official Reserves………………………+$ We give (inpayments/outpayments) for imports & get (inpayments/outpayments) for exports. 42. U.S. export transactions create foreign (demand for/supply) dollars[appreciation] & this satisfaction (increases/decreases) the supplies of foreign monies held by U.S. banks [depreciation]. 43. If we brought home our 40,000 troops in South Korea, this would contribute to a U.S. balance of payments (surplus/deficit). 44. U.S. tourists traveling in large numbers to Europe would contribute to a U.S. balance of payments (surplus/deficit). 45. The U.S. balance of payments show the balance between (all/some of) the payments the U.S. receives from foreign countries and (all/some of) the payments which we make to them. 46. If a nations merchandise exports are $60 billion, while its merchandise imports are $70 billion, this nation is experiencing a balance of trade (surplus/deficit) of $10 billion. 47. The (current/capital) account includes trade in currently produced goods/services[X-M]. 48. The (current or capital/financial) account reflects flows of real [land, factories, etc.] and financial assets [securities]. 49. There (must/must not) always be a balance of a nations total international payments. [includes official reserves] 50. A deficit on the current account tends to cause a (deficit/surplus) on the capital account. 17 Ed. -$20 $10 $10 -$10 -$10 $45 $25 $25 $5 $5 -$5

27 Review for Global Trade I have a comparative advantage.

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29 Brazils DCC Perus DCC Crusts Pastries Pastries Crusts 10 1C = __ P __ C = 1P 1C = __P 1 P = __C Terms of Trade 1C = ____ Peru will produce Crusts and trade with Brazil for 1 Pastry [better than ½ P] Brazil will produce Pastries & trade with Peru for 1 Crust [better than ½ C] 1P 2 ½ ½ 2 _______ has an absolute advantage [ absolutely more ] in pastries. _______ has an absolute advantage [ absolutely more ] in crusts. Brazil Peru [or anywhere between ½ P & 2 P] [like ¾, 1 ¼, 1 ½, or 1 ¾ P] 5 2 ½ 5 *Both Brazil and Peru are able to consume (CPC) beyond their PPCs

30 absolute advantage in both commodities 6. (Djibouti/Mexico) has an absolute advantage in both commodities. comparative advantage in producing wheat 7. (Djibouti/Mexico) has a comparative advantage in producing wheat. absolute disadvantage in both commodities 8. (Djibouti/Mexico) has an absolute disadvantage in both commodities. comparative advantage in caviar 9. Djibouti/Mexico) has a comparative advantage in caviar. Trade1 caviar wheat 10. Trade can occur between the two when 1 caviar is exchanged for(1/2.5/3) wheat. Terms of Trade: 1S = ___ A Product A B C D E A vocados S oybeans DCC: 1S costs ___A ___ S costs 1A ___ S costs 1A Product A B C D E A vocados S oybeans DCC: 1S costs ___A ___ S costs 1A ___ S costs 1A Mexicoopportunity cost of 1S 1. In Mexico, the opportunity cost of 1S is (1/3 or 4 or 5 ) avocados. Mexico 2. If these 2 nations specialize, Mexico will produce (avocados/soybeans) & the U.S. U.S. will produce (avocados/soybeans). Mexicoabsolute disadvantage 3. Mexico has an absolute disadvantage in (avocados only/soybeans only/both avocados and soybeans). both produced at combination C 4. If both produced at combination C prior to specialization, what would be the gains after tradeavocadossoybeans gains after trade? (0/3/2/10) tons of avocados and (1/3/2/10) tons of soybeans. terms of tradesoybeansavocados 5. The terms of trade would be 1 ton of soybeans for (1/3/4/3.5) tons of avocados Avocados Soybeans Mexicos PPF (tons) U.S. PPF (tons) ¼1/3 DCC: Djibouti 1C costs ___ W ___C costs 1W 2 ½ DCC: Mexico 1C costs ___ W ___C costs 1W 3 1/3 Djibouti Djibouti Caviar 10 hours Wheat 5 hours Mexico Mexico Caviar 18 hours Wheat 6 hours Terms of Trade: 1C = ___ W 2.5 Soybeans Avocados 24 A 33 A 57 A 19 S 9 S 28 S

31 inputshourssmaller numberabsolute And with inputs (hours), the smaller number indicates absolute advantagemore efficient advantage; that country is more efficient because it can produce absolutely faster a good absolutely faster the same output. Absolute Advantage [Outputs v. Inputs outputsquantitylarger numberabsolute advantage absolutelymore more efficient Absolute Advantage [Outputs v. Inputs] Remember that with outputs or quantity, the larger number indicates absolute advantage; that country can produce absolutely more with the same inputs, and is more efficient. ProductMarket ResourceMarket

32 Product Market [outputs] Product Market [outputs] Country Guns Butter Rabbit 40 units 120 units Wabbit 20 units 40 units Resource Market [inputs] Resource Market [inputs] Country Guns Butter Rabbit 40 hours 120 hours Wabbit 20 hours 40 hours W hat country has an absolute advantage in guns? W hat country has an absolute advantage in guns? Rabbit Wabbit Why does Rabbit have an absolute advantage in guns ? Why does Wabbit have an absolute advantage in guns ? Rabbit can produce absolutely more guns than Wabbit [40 units v. 20 units] Wabbit can produce guns absolutely faster than Rabbit [20 hours v. 40 hours] Rabbit W hat country has a comparative advantage in guns? W hat country has a comparative advantage in guns? Wabbit Rabbit Wabbit can produce guns at a lower opportunity cost [2 butters v. 3 butters] Rabbit can produce guns at a lower opportunity cost [1/3 butter v. 1/2 butter] Rabbit 1 G = 3 B 1/3 G = 1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1/3 B = 1G Wabbit 1 B = 2 G 1/2 B = 1G Wabbit Rabbit Wabbit Lets change inputs into outputs. Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G Output v. Input

33 Exports[Decreased] Imports[Increased] Strong Dollar As Interest Rates Rose... [all the way to 13%] Exports decreased. Agricultural exports dropped from $44 billion to $28 billion as foreign agricultural goods became cheaper Imports increased as they became cheaper. The dollar got stronger and stronger

34 ¥50 Quantity of Dollars ¥ 100 P rice $S$$S$ D1$D1$D1$D1$ [Exchange Rate: $1 = Y100 ] D A A D D2D2D2D2 ¥ 150 E1E1E1E1 E2E2E2E2 E3E3E3E3 D3D3D3D3 Yendepreciates Yenappreciates ¥ looking for $s Appreciation/Depreciation M X X M Taste [products/assets] Interest Rates Price Level Growth Rate Currency Price Currency Price + - $s looking for ¥ S$S$S$S$ $D$$D$ # of Dollars ¥100 ¥150 ¥50 S$S$S$S$ S$S$S$S$ D A A D ¥/$ $1.50 # of ¥ S1¥S1¥S1¥S1¥ $/¥ S2¥S2¥S2¥S2¥ D ¥D¥¥D¥ A Japan will supply more yen for dollars. E2E2E2E2 E2E2E2E2 E2E2E2E2 S2¥S2¥S2¥S2¥ $1.50 D Japan will supply less yen for d ollars. A U.S. will supply fewer $ s for ¥. U.S. will supply more $ s for ¥. E2E2E2E2

35 Increase in taste 1. Increase in taste [more demand for a countrys products or assets] Increase in interest rates 2. Increase in interest rates [Overseas investors increase their investments there.] Decrease in price level 3. Decrease in price level [overseas buyers want to buy our cheaper goods.] Decrease in growth rate 4. Decrease in growth rate [ A countrys declining economy results in them buying less from other countries; decreasing demand for their currency and thus appreciating the declining economys currency] 5. Decrease in the price of a currency relative to the other

36 Costa Rica buys 1 mil. fewer Dell computers 1. If Costa Rica buys 1 mil. fewer Dell computers dollar our the dollar would (appreciate/depreciate) & our exports to Costa Rica exports to Costa Rica would (increase/decrease). U.S. interest rates decrease faster 2. If U.S. interest rates decrease faster than baht Thailands, the baht would (appreciate/depreciate) & their imports their imports would (increase/decrease). prices are dropping more in Mexico 3. If prices are dropping more in Mexico than peso in the U.S., the peso will (appreciate/ depreciate ) Mexicos exports and Mexicos exports will ( increase /decrease). Afghanistans growth rate is faster than that of China 4. If Afghanistans growth rate is faster than that of China, AfghaniAfghanistans the Afghani will (appreciate/depreciate) and Afghanistans exports exports to China will (increase/decrease). dollar price of the Kwacha [Zambia] increases 5. If the dollar price of the Kwacha [Zambia] increases, dollarour the dollar has (appreciated/depreciated) and our imports imports from Zambia will (increase/decrease). buy 3 million more American iDoggy iWoggies 6. If Haiti wants to buy 3 million more American iDoggy iWoggies, dollarour imports from the dollar (appreciates/depreciates) and our imports from Haiti Haiti should (increase/decrease). quetzalprice of the dollar increases 7. If the quetzal (Guatemala) price of the dollar increases the quetzal their imports quetzal will (appreciate/depreciate ) and their imports will (increase/decrease).

37 Djibouti buys 2 mil. fewer U.S. iFuzzy iWuzzies 1. If Djibouti buys 2 mil. fewer U.S. iFuzzy iWuzzies dollar the dollar would (appreciate/depreciate) & our exports to Djibouti would (increase/decrease). U.S. interest rates are increasing faster 2. If U.S. interest rates are increasing faster dollar than Ghanas, the dollar would (appr/depr) & our imports our imports from Ghana would (incr/decr). prices are increasing more in Eritrea 3. If prices are increasing more in Eritrea than Eritrean birr in the U.S., the Eritrean birr will (apprea/deprea) Eritreas imports and Eritreas imports will (increase/decrease). U.S. growth rate is faster than that of Botswana 4. If the U.S. growth rate is faster than that of Botswana, dollarU.S. the dollar will (appreciate/depreciate) and U.S. exports exports to Botswana will (increase/decrease). dollar price of the Croatian kuna increases 5. If the dollar price of the Croatian kuna increases, the dollar dollar has (appreciated/depreciated) and our imports imports from Croatia will (increase/decrease). buy 6 million Lindsay Lohan 6. If the Congo wants to buy 6 million Lindsay Lohan dollsdollar dolls, the dollar (appreciates/depreciates) and our imports from the Congo should (increase/decrease). markka (Finland) price of the dollar increases 7. If the markka (Finland) price of the dollar increases the markka markka will (appreciate/depreciate ) and their imports will (increase/decrease). Lohan Doll

38 1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30 ). 2. T he U.S.s balance on goods & services is a (deficit/surplus) of ($30/$40) bil. 3. The U.S.s balance on the current account is a (deficit/surplus) of ($25/$35). 4. The balance on the capital and financial account is a (surplus/deficit) of ($25/$30/$40). 5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5. [dont include official reserves here] 6. The official reserves account indicates the U.S. (imported/exported) $5 billion of its stock of foreign reserves. + export [A + here means we will export a stock of foreign money ($s will enter U.S.)] – import [A – here means we will import a stock of foreign money ($s will exit U.S.)] U.S. Goods export………………….…….…..+$100 U.S. Goods imports…………………………… U.S. Service exports………………………… U.S. Service imports………………………….…-90 Net Investment income………………..……….+20 Net transfers………………………………….…..-15 Balance on capital account …………………….-5 Foreign purchases of assets in the U.S…… +45 U.S. purchases of assets abroad…………… -10 Official Reserves…………………………………. -5 $20 -$30 G/S Current Account - $25 $30 Balance on Goods Bal. on Curr. Acct. Balance on Cap. & Financial Acct. - $ 50 $5 $5 Balance of Payments

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40 Quantity of Dollars ¥50 ¥ 100 P rice D1$D1$D1$D1$ [Exchange Rate: $1 = Y100 ] D A A D D2D2D2D2 ¥ 150 E1E1E1E1 E2E2E2E2 E3E3E3E3 D3D3D3D3 Yendepreciates Yenappreciates ¥ looking for $s Appreciation/Depreciation M XM XM XM X X M Taste [products/assets] Interest Rates Price Level Growth Rate (Y) Currency Price Currency Price + - $s looking for ¥ ¥/$ $S$$S$

41 increase in taste 1. Show how an increase in taste for Japanese cars would affect the market for the Yen and the Dollar. # of Yen # of Dollars 2. How would an increase in Mexicos real interest rate real interest rate affect the value of the Peso and the value of the Euro? high inflation 3. How would high inflation in South Korea affect the market for the Won and the Dollar? economic 4. How would a U.S. economic expansion expansion affect the value of the Dollar and the value of the Yen? e1 # of Pesos # of Euros # of Won # of Dollars # of Yen D D D D D D D D SS S S S S S S $ Price of Yen Yen Price of $ Euro Price of Peso Peso Price of Euro $ Price of Won Won Price of $ Yen Price of $ $ Price of Yen $1 ¥100 P $1 W1,030 $1 ¥100

42 change in consumer 5. There is a change in consumer preferences for U.S. Goods preferences [Taste] for U.S. Goods by the Japanese. # of Dollars # of Yen Interest Rates in the U.S. 6. Interest Rates in the U.S. NCREASE INCREASE relative to the Interest Rates in Japan. change in consumer 7. There is a change in consumer preferences Taste for Japanese preferences [ Taste ] for Japanese cars, computers and airplanes cars, computers and airplanes by Americans. U.S. economy 8. The U.S. economy is in a strong recovery after the GREAT GDP RECESSION. GDP, or National Y, HIGHER in the U.S. is now HIGHER and more Americans have more DI. e1 # of Dollars # of Yen # of Dollars # of Yen # of Dollars # of Yen D D D D D D D D SS S S S S S S $1 ¥100 $1 ¥100 $1 ¥ price of $ $ price of ¥ $1 $ price of ¥ ¥100 ¥ price of $


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