1. Balance of Payments & Exchange Rates
International Economics

2. 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

3. 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

4. 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

5. 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.

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

7. 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