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19. Exchange Rates, the Balance of Payments, and Trade Deficits. 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 - PowerPoint PPT Presentation
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Copyright 2008 The McGraw-Hill Companies19-1
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
19Exchange Rates, the Balance of Payments, and Trade Deficits
Copyright 2008 The McGraw-Hill Companies19-2
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-3
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-4
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
Financing International Trade
U.S. Trade Balances in Goods and ServicesSelect Nations, 2004
Goods and Services SurplusGood and Services Deficit
AustraliaBelgium
Canada
China
Germany
Mexico
Netherlands
+6.8
-66.5
-45.8
+4.4
-162
-45.1
+11.8
Source: BEA
GLOBAL PERSPECTIVE
-10-20-30-40-50-60-70-160 10 20
Japan -75.6
Copyright 2008 The McGraw-Hill Companies19-5
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-6
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-7
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
Q0
Dol
lar P
rice
of 1
Pou
nd
Quantity of Pounds
P
Flexible Exchange RatesThe Market for Foreign Currency (Pounds)
Dl
Sl
DollarDepreciates(PoundAppreciates)
DollarAppreciates(PoundDepreciates)
ExchangeRate: $2 = £1
$2
$3
$1
Ql
Copyright 2008 The McGraw-Hill Companies19-8
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
Q0
Dol
lar P
rice
of 1
Pou
nd
Quantity of Pounds
P
Flexible Exchange RatesThe Market for Foreign Currency (Pounds)
Dl
Sl
ExchangeRate: $2 = £1
$2
$3
$1
Ql
D2
ExchangeRate: $3 = £1
BalanceOf Payments
Deficit
Q2
x ab
c
Copyright 2008 The McGraw-Hill Companies19-9
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-10
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-11
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-12
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-13
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-14
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-15
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast 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 Companies19-16
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
Key Terms• balance of payments• current account• balance on goods an
d services• trade deficit• trade surplus• balance on current ac
count• capital and financial a
ccount• balance on capital an
d financial• balance-of-payments
deficits and surpluses
• official reserves
• flexible- or floating- exchange-rate system
• fixed-exchange-rate system
• purchasing-power-parity theory
• currency interventions
• exchange controls• gold standard• devaluation• Bretton Woods syste
m• International Monetar
y Fund (IMF)• managed floating exc
hange rates
Copyright 2008 The McGraw-Hill Companies19-17
Financing International TradeCapital and Financial AccountFlexible Exchange RatesFixed Exchange RatesInternational Exchange-Rates SystemRecent U.S. Trade DeficitsLast Word
Key Terms
End Show
Course Review…
FinalDiscussions…
