Copyright 2008 The McGraw-Hill Companies 19-1 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show 19 Exchange Rates, the Balance of Payments, and Trade Deficits

Copyright 2008 The McGraw-Hill Companies 19-2 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Chapter Objectives How Currencies of Different Nations are Exchanged When International Transactions Take Place About the Balance Sheet the United States Uses to Account for the International Payments it Makes and Receives How Exchange Rates are Determined in Currency Markets The Difference Between Flexible Exchange Rates and Fixed Exchange Rates The Causes and Consequences of Recent Record-High U.S. Trade Deficits

Copyright 2008 The McGraw-Hill Companies 19-3 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Financing International Trade U.S. Export Transactions U.S. Import Transactions Balance of Payments The Current Account –Balance on Goods –Balance on Services –Trade Deficit –Trade Surplus –Balance on Current Account W19.1

Copyright 2008 The McGraw-Hill Companies 19-4 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Financing International Trade U.S. Trade Balances in Goods and Services Select Nations, 2004 Goods and Services SurplusGood and Services Deficit Australia Belgium Canada China Germany Mexico Netherlands Source: BEA GLOBAL PERSPECTIVE Japan -75.6

Copyright 2008 The McGraw-Hill Companies 19-5 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Capital and Financial Account Capital Account Financial Account Balance on the Capital and Financial Account –Payments, Deficits, and Surpluses –Balance-of-Payments Deficits and Surpluses –Official Reserves

Copyright 2008 The McGraw-Hill Companies 19-6 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Flexible Exchange Rates Flexible or Floating Exchange Rates Fixed Exchange Rate system Depreciation and Appreciation Determinants of Exchange Rates –Changes in Tastes –Relative Income Changes –Relative Price-Level Changes Purchasing-Power-Parity Theory –Relative Interest Rates –Speculation G19.1

Copyright 2008 The McGraw-Hill Companies 19-7 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Q 0 Dollar Price of 1 Pound Quantity of Pounds P Flexible Exchange Rates The Market for Foreign Currency (Pounds) DlDl SlSl Dollar Depreciates (Pound Appreciates) Dollar Appreciates (Pound Depreciates) Exchange Rate: $2 = £1 $2 $3 $1 QlQl

Copyright 2008 The McGraw-Hill Companies 19-8 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Q 0 Dollar Price of 1 Pound Quantity of Pounds P Flexible Exchange Rates The Market for Foreign Currency (Pounds) DlDl SlSl Exchange Rate: $2 = £1 $2 $3 $1 QlQl D2D2 Exchange Rate: $3 = £1 Balance Of Payments Deficit Q2Q2 x a b c

Copyright 2008 The McGraw-Hill Companies 19-9 Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Flexible Exchange Rates Flexible Rates and the Balance of Payments Disadvantages of Flexible Exchange Rates Uncertainty and Diminished Trade Terms-of-Trade Changes Instability

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Fixed Exchange Rates Use of Reserves –Currency Interventions Trade Policies Exchange Controls and Rationing –Distorted Trade –Favoritism –Restricted Choice –Black Markets Domestic Macroeconomic Adjustments

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show International Exchange-Rate Systems The Gold Standard: Fixed Exchange Rates –Devaluation –Gold Flows –Domestic Macroeconomic Adjustments –Collapse of the Gold Standard

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show International Exchange-Rate Systems The Bretton Woods System –International Monetary Fund (IMF) –IMF and Pegged Exchange Rates Official Reserves Gold Sales IMF Borrowing –Fundamental Imbalances: Adjusting the Peg –Demise of the Bretton Woods System

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show International Exchange-Rate Systems The Current System: The Managed Float –Managed Floating Exchange Rates In Support of the Managed Float Concerns With the Managed Float

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Recent U.S. Trade Deficits Causes of Trade Deficits Implications of U.S. Trade Deficits –Increased Current Consumption –Increased U.S. Indebtedness

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Speculation in Currency Markets Currency Purchases to Purchase Goods and Services Contributing to Currency Market Fluctuations Speculator’s Role and Activities Smoothing Short-Term Fluctuations Absorbing Risk Futures Market at Work Positive Role Played Overall Last Word Negative or Positive Influence on Currency Markets and Trade

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Key Terms balance of payments current account balance on goods and servicesbalance on goods and services trade deficit trade surplus balance on current accountbalance on current account capital and financial accountcapital and financial account balance on capital and financialbalance on capital and financial balance-of-payments deficits and surplusesbalance-of-payments deficits and surpluses official reserves flexible- or floating- exchange-rate systemflexible- or floating- exchange-rate system fixed-exchange-rate systemfixed-exchange-rate system purchasing-power- parity theorypurchasing-power- parity theory currency interventionscurrency interventions exchange controls gold standard devaluation Bretton Woods systemBretton Woods system International Monetary Fund (IMF)International Monetary Fund (IMF) managed floating exchange ratesmanaged floating exchange rates

Copyright 2008 The McGraw-Hill Companies Financing International Trade Capital and Financial Account Flexible Exchange Rates Fixed Exchange Rates International Exchange- Rates System Recent U.S. Trade Deficits Last Word Key Terms End Show Course Review… Final Discussions…