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Capital Flows and the Balance of Payments and The Foreign Exchange Market Lesson 39 Sections 41, 42.

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Presentation on theme: "Capital Flows and the Balance of Payments and The Foreign Exchange Market Lesson 39 Sections 41, 42."— Presentation transcript:

1 Capital Flows and the Balance of Payments and The Foreign Exchange Market
Lesson 39 Sections 41, 42

2 Capital Flows and the Balance of Payments
Balance of Payment Accounts Summary of a country’s transactions with other countries Balance of Payments on the Current Account Current Account Transactions that do not create liabilities Balance of Payments on the Financial Account Financial Account Transactions that do create liabilities The Balance of Payments on Goods and Services Difference in the value of imports versus the value of exports Goods only, not services Merchandise Trade Balance Trade balance Difference between imports and exports Current Account - Financial Account = 0

3 Modeling the Financial Account (41)
Underlying Determinants of Internationals Capital Flows Money always seeks the best return Interest Rate Quantity of Loanable Funds Supply Demand 6% US Market Loanable Funds Quantity of Loanable Funds Interest Rate Supply Demand 2% British Market Loanable Funds Capital Outflow 4% Capital Inflow

4 The Foreign Exchange Market (42)
The Role of the Exchange Understanding the Exchange Rates Buying and selling from country to country requires that money be exchanged for the transactions to take place. The monies used are held by the Foreign Exchange Market. The Foreign Exchange Market determines the exchange rate between different currencies. Appreciation Depreciation Inflation and Real Exchange Rates Adjusted for inflation Purchasing Power Parity (PPP)

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