1. Principles of Economics 2nd edition by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing

2. Exchange Rates, Balance of Payments, and International Debt
Chapter 32
Exchange Rates, Balance of Payments, and International Debt
6/2/2018
©1999 South-Western College Publishing

3. This chapter discusses principles associated with
Appreciation and Depreciation of Currencies
Floating and Fixed Exchange Rates
International Debt and Debt Service
Foreign Exchange Markets
Exchange Rates
Arbitrage
Devaluation
Balance of Payments
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4. What determines the demand for a currency on the international market?
Foreigners demand a another country’s currency for what that currency can buy in that country
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5. What is a country’s Exchange Rate?
The price of one country’s currency measured in terms of another country’s currency
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6. What determines the exchange rates of different currencies?
The supply and demand for that currency on the international market
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7. What determines the Supply and Demand of a currency?
Relative ...
price levels
rates of interest
rates of growth
political & economic stability
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8. What causes the Supply Curve for a currency to shift? Changes in ...
Income
Tastes
Interest rates
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9. D S1 S2 Q1 Q2 P1 P2 Right Shift in Supply 9
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10. What causes the Demand Curve for a currency to shift? Changes in ...
Income
Tastes
Interest rates
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11. S D2 D1 Q1 Q2 P2 P1 Right Shift in Demand 11
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12. What is a Floating Exchange Rate?
An exchange rate determined strictly by the demands and supplies for a nation’s currency
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13. What does it mean that a currency has Appreciated?
A rise in the price of a nation’s currency relative to foreign currencies
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14. What does it mean that a currency has Depreciated?
A fall in the price of a nation’s currency relative to foreign currencies
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15. What creates mutually consistent Exchange Rates?
Arbitrage
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16. What is Arbitrage?
The practice of buying a foreign currency in one market at a low price and selling it in another at a higher price
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17. What is a problem with Floating Exchange Rates?
The value of a currency may change from the time of ordering a product and when the product is delivered
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18. How do we minimize this problem?
A country can try to fix the value of its currency through the process of buying and selling it on the world market
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19. How can a country decrease the value of another nation’s currency relative to its own?
It can take the other country’s currency and sell it on the foreign exchange market, thus increasing the supply
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20. What is a Foreign Exchange Reserve?
The stock of foreign currencies a government holds
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21. How can a county lower the value of its currency on the foreign exchange market?
It can sell its currency for foreign currencies, thus increasing the supply
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22. From the International Monetary Fund (IMF)
Beside Foreign Exchange Reserves, where else can a country get a foreign currency?
From the International Monetary Fund (IMF)
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23. For information on Exchange Rates:
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24. What is the IMF?
An international organization formed to make loans of foreign currencies to countries facing balance of payments problems
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25. What is a country’s Balance of Payments?
An itemized account of a nation’s foreign economic transactions
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26. What does it mean to have a Favorable Balance of Payments?
More money is entering a country than leaving the country
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27. What does it mean to have a Payments Deficit?
More money is leaving a country than entering a country
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28. When is there a balance in a country’s Balance of Payments?
When the amount of money entering equals the amount of money leaving
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29. Why can a Payments Surplus be a problem?
Too much money entering a country over time can cause inflation
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30. Why can a Payments Deficit be a problem?
Too much money leaving a country over time can cause unemployment
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31. What is the difference between a Balance of Payments and a Balance of Trade?
The balance of payments measures the flow of all money, whereas the balance of trade considers only imports and exports
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32. What are additional ways money can enter or leave a country?
Imports and exports of services
Income receipts and payments on investments
Unilateral transfers
Buying & selling of assets
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33. Can the Balance of Payments offset the Balance of Trade?
Money can leave a country because of trade - but more money can enter the country in other areas
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34. What is the Balance on Capital Account?
A category that itemizes changes in the foreign asset holdings of a nation and that nation’s asset holdings abroad
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35. Is a Payments Deficit a good or bad indicator of how well we are doing?
A good indicator, it shows that we are able to buy from foreigners more than they buy from us
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36. What can cause a Payments Surplus?
a healthy economy
relatively high interest rates
government borrowing
relatively higher productivity
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37. What is a major problem for many less-developed countries?
High international debt
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38. What is a country’s International Debt?
The total amount of outstanding IOU’s a nation is obligated to repay other nations and international organizations
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39. What is a country’s Debt Service?
Interest payments on international debt as a percentage of a nation’s merchandise exports
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40. In the long run, how will a Payments Surplus be corrected?
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41. When too much money enters the value increases internationally as the demand has increased
The higher value makes foreign goods less expensive and our goods more expensive to foreigners
As less money enters our country and more money leaves, our surplus problem is solved
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42. In the long run, how will a Payments Deficit be corrected?
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43. When too much money leaves the value decreases internationally as the supply increases
The lower value makes foreign goods more expensive and our goods less expensive to foreigners
As more money enters our country and less money leaves, our deficit problem is solved
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44. S D P1 P3 P2 Q3 Surplus Deficit 44
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45. http://www.xe.net/currency http://www.bog.frb.fed.us/releases/H10
4545
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46. What determines the demand for a currency internationally?
What is a country’s Exchange Rate?
What determines the exchange rates of different currencies?
What determines the Supply and Demand of a currency?
What is Appreciation?

47. What is Depreciation?
What is Balance of Payments?
What does it mean to have a Favorable Balance of Payments?
What does it mean to have a Payments Deficit?
In the long run, how will a Payments Surplus be corrected?
In the long run, how will a Payments Deficit be corrected?

48. END
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