Balance of Payments & Exchange Rates International Economics

Balance of Payments The BOP is an accounting of a country's international transactions for a particular time period Any transaction that causes money to flow into a country is a credit Any transaction that causes money to flow out is a debit 2 subaccounts Current account Financial account Balance of payments must equal $0

Current Account Balance on goods and services Net investment income Exports are a credit (+) Imports are a debit (-) Negative balance of trade means a trade deficit occurred Net investment income Interest and dividend payments Net transfers Foreign aid, money sent to relatives of immigrants

Financial Account Foreign purchases of assets in the U.S. (+) U.S. purchases of assets abroad (-) Financial Assets Stocks, bonds, foreign currencies, etc. Foreign Direct Investment Direct investment into production or business in a country by a company in another country Buying a company in the target country Expanding operations of an existing business in that country

Supply of and Demand for Dollars The supply of U.S. dollars is determined by U.S. demand for foreign goods, services and investments. Demand for U.S. dollars is determined by foreign demand for U.S. goods, services and investments.

Flexible Exchange Rates Determinants Changes in tastes Change in relative incomes Change in relative prices Change in relative real interest rates Speculation

Monetary and Fiscal Policies Affect Exchange Rates Changes in relative real interest rates are created by these policies Changes in the international value of the dollar affect imports and exports Changes in NX affect AD