Slide 2 Losers [anyone buying with pesos] 1. Mexicans who buy
American products 2. Mexican businesses that buy supplies from the
U.S. 3. American businesses that sell products to Mexico 4. Mexican
visitors to the U.S. 5. Those who primarily do business in pesos
Winners [anyone buying with dollars] 1. American tourists to Mexico
2. People who send dollars to family or friends in Mexico 3. U.S.
businesses that buy from Mexico 4. American consumers who buy
Mexican imports 5. Those who primarily do business in dollars $1 =
P3.5 $24,000 car = 84,000 pesos $1 = P13.0 $24,000 car = 312,000
pesos Slide 3 2002 FRQ 2002 FRQ real interest rates [RIR] in the
U.S. & Japan7% The real interest rates [RIR] in the U.S. &
Japan are equal to 7% [say 9%-2%=7%]. real interest rate in the
U.S. increases to 8%real interest rate in The real interest rate in
the U.S. increases to 8% while the real interest rate in Japan
decreases to 6%. financialcapital flows be affected a. How &
why will financial capital flows be affected by this change in real
interest rates? financial capitalnot real capital [financial
capital, not real capital] graph for the yen b. Using a correctly
labeled graph for the yen market market, show and explain how the
value of the yen will change relative to the value of the dollar.
c. Explain how the change in the value of the yen will affect each
of the following in the U.S. Imports (1.) Imports from Japan
Exports (2.) Exports to Japan 2002 AP Essay on Higher Interest
Rates in the U.S. $1.15 $1.00 in A # of Yen # of Yen $/ D2D2D2D2
D1D1D1D1 S E2E2E2E2 E1E1E1E1 (D) [Nominal IR-Inflation = RIR] Slide
4 1. Assume that the U.S. trades with Japan. Draw a correctly
labeled graph of the foreign exchange market for the U.S. dollar.
Lets say that United States output [GDP] decreases. Show &
explain how the supply of the U.S. dollar will be affected in the
foreign exchange market.. what will happen to the 2. Given your
answer in 1, indicate what will happen to the value of the U.S.
dollar relative to the Japanese yen value of the U.S. dollar
relative to the Japanese yen. S1$S1$S1$S1$ D$D$D$D$ Quantity of
Dollars E1E1E1E1 /$ 100 S2$S2$S2$S2$ E2E2E2E2 120 Answer 1: The
decrease in real U.S. output will cause job losses in the U.S. and
decrease the dollars supplied for Japanese goods. Answer 2: Due to
the decrease in supply of U.S. dollars [as shown above], it will
take more yen to purchase a dollar, depreciating the yen and
therefore appreciating the dollar. Slide 5 Other Strange Sounding
Currencies Other Strange Sounding Currencies Indias RupeeBrazils
Real Nicaraguas Cordoba Indonesias RupiahCosta Ricas Colon (100
centimos) Brazils RealGuatemalas Quetzal Laos KipZambias Kwacha
Eritreas BirrCroatias Kuna Irans RialBotswanas Pula Spains
PesetaVenezuelas Bolivar Kuwaits DinarBulgarias Lev (100 stotinki)
Saudi Arabias RiyalChinas Renminbi Mongolias Tugrik (mongo)Russias
ruble Gambias Dalasi (bututs)Ghanas Cedi Hungarys Forint
(filler)Haitis Gourde S. Korean won (100 chon)Thailands Baht (100
satang) Afghanistans Afgani (puls) The Afghan note10,000 Afghanis
is worth 25 U.S. cents; or $1 = 40,000 Afghanis. The $ 25 million
reward for Osami is worth 950 billion Afghanis. With a typical wage
of $4 a month, the typical Afghan could live 500,000 years off the
reward. 5Kuna [worth 25 cents] Kip Slide 6 trillions of In
Afghanistan, there are trillions of Afghan billslittle value Afghan
bills but they have little value. burning much of the currency They
are burning much of the currency and hope to shrink the currency
notes from $15 trillion all the way down to $15 billion $15
trillion all the way down to $15 billion. almost worthless The
Afghan has become diluted in value, almost worthless, overprinting
and counterfeiting because of overprinting and counterfeiting. They
are tossing old bills into an incinerators Afghans tossing old
bills into an incinerators to make Afghans more scarce more scarce.
[worth 12.5 cents] And why havent we bee able to find Osama ? Slide
7 Increase in taste 1. Increase in taste [more demand for a
countrys products or assets] Increase in interest rates 2. Increase
in interest rates [Overseas investors increase their investments
there.] Decrease in price level 3. Decrease in price level
[overseas buyers want to buy our cheaper goods.] Decrease in growth
rate 4. Decrease in growth rate [ A countrys declining economy
results in them buying less from other countries; decreasing demand
for their currency and thus appreciating the declining economys
currency] 5. Decrease in the price of a currency relative to the
other Slide 8 (50%) Mexico increases their investments in the
U.S.,supply of Mexican (50%) 1. If Mexico increases their
investments in the U.S., the supply of Mexican pesosto the foreign
exchange marketdollar price of the peso pesos to the foreign
exchange market and the dollar price of the peso will most likely
change in which of the following ways? Supply of PesosDollar Price
of Peso a. increaseincrease b. increasedecrease c. decreaseincrease
d. decrease decrease e. decreasenot change (41%) real interest rate
in Canada increases (41%) 2. If the real interest rate in Canada
increases relative to the real interest rate for in Japan and there
are no trade barriers between the two countries, then for Canada,
which of the following will be truefinancial capitalvalue Canada,
which of the following will be true of its financial capital, the
value of its currencyits exports of its currency, and its exports?
Capital FlowCurrencyExports a. InflowAppreciationIncrease b.
InflowAppreciationDecrease c. InflowDepreciationIncrease d.
OutflowDepreciationIncrease e. OutflowAppreciationDecrease The
higher real IR in Canada would attract more financial inflows
capital inflows from overseas, appreciating appreciating the
Canadian decreasing its dollar, and decreasing its exports exports
because they are now more expensive. peso As pesos are exchanged
for dollars, peso supply increase supply increase in depository
institutions. There is an increase in demand for the decreasing the
dollar and it appreciates, decreasing the dollar price of the peso
dollar price of the peso. physical capital chases lower interest
rates financial capital 'chases' higher interest rates Remember
that physical capital chases lower interest rates and financial
capital 'chases' higher interest rates. Slide 9 (51%) increase in
investment demand in the U.S.real interest rate (51%) 3. With an
increase in investment demand in the U.S. the real interest rate
riseschange in the capital stock in the U.S. rises. In this
situation, the most likely change in the capital stock in the U.S.
international value of the dollar and in the international value of
the dollar would be which of the following? Capital Stock
inInternational Value United Statesof the Dollar United Statesof
the Dollar a. IncreaseDecrease b. IncreaseNo change c.
IncreaseIncrease d. DecreaseIncrease e. No changeDecrease (64%)
cause the U.S. dollar to (64%) 4. Which of the following would
cause the U.S. dollar to increase in value increase in value
compared to the Japanese yen? a. An increase in the money supply in
the U.S. b. An increase in interest rates in the U.S. c. An
increase in the U.S. trade deficit with Japan d. The U.S. purchase
of gold on the open market e. The sale of $2 billion dollars worth
of Japanese television sets to the U.S. (71%) why many U.S.
economists support (71%) 5. Which of the following best explains
why many U.S. economists support free trade free trade? a. Workers
who lose their jobs can collect unemployment compensation. b. It is
more important to reduce world inflation than to reduce U.S.
unemployment. c. Workers are not affected; only business suffer. d.
The long-run gains to consumers & some producers exceed the
losses to other producers. e. Government can protect U.S.
industries while encouraging free trade. More real investment would
result in an increase in real capital stock in the U.S. The
increase in the real interest rate would increase financial
investment demand for the dollar as it appreciates for the dollar
as it appreciates. Slide 10 Appreciation/Depreciation Practice
Japan buys 10 million iPhones 1. If Japan buys 10 million iPhones
dollar our the dollar would (appr/depr) and our imports from Japan
imports from Japan would (incr/decr). U.S. in. rates are increasing
faster 2. If U.S. in. rates are increasing faster dollar than
Japans, the dollar would (appr/depr) our exports and our exports
would (increase/decrease). prices are dropping more in Japan 3. If
prices are dropping more in Japan yen than in the U.S., the yen
will (appr/depr) Japans imports and Japans imports will
(increase/decrease). U.S. growth rate is faster than that of Japan
4. If the U.S. growth rate is faster than that of Japan, dollarU.S.
the dollar will (appreciate/depreciate) and U.S. imports imports
from Japan will (increase/decrease). dollar price of the yen
decreases 5. If the dollar price of the yen decreases, the
dollarour dollar has (appreciated/depreciated) and our imports
imports from Japan will (increase/decrease). Slide 11
Appreciation/Depreciation Practice [continued] Russia sells 10 bil.
worth of oil to the 6. If Russia sells 10 bil. worth of oil to the
U.S.rubletheir U.S. the ruble would (appr/depr) and their imports
from the U.S. imports from the U.S. would (incr/decr). U.S. in.
rates are decreasing faster 7. If U.S. in. rates are decreasing
faster here dollar than in Canada, the dollar would (appreciate/
U.S. exports depreciate) & U.S. exports would (incr/decr).
prices are increasing more in Japan 8. If prices are increasing
more in Japan dollar than in the U.S., the dollar will (appr/depr)
our exports and our exports will ( increase /decrease). U.S. growth
rate is slower than that of Canada 9. If the U.S. growth rate is
slower than that of Canada, Canadian dollarCanadas the Canadian
dollar will (appreciate/depreciate) & Canadas exports exports
to the U.S. will (increase/decrease). dollar price of the euro
increases 10. If the dollar price of the euro increases, the
dollarour dollar has (appreciated/depreciated) and our our imports
imports from France will (increase/decrease). Slide 12 Malaysias
price level is decreasing faster than that of Brazil 4. If
Malaysias price level is decreasing faster than that of Brazil,
Malaysian ringgitMalaysias exports the Malaysian ringgit will
(apprec/deprec) & Malaysias exports to Brazil to Brazil will
(increase/decrease). growth rate is less rapid in Djibouti 5. If
growth rate is less rapid in Djibouti than in Swaziland, Djibouti
bouti then the Djibouti bouti will (appreciate/depreciate) and
Djiboutis exports Djiboutis exports will (increase/decrease). Euro
price of the S. Korean won decreasesEuro 6. If the Euro price of
the S. Korean won decreases, the Euro has European exports to Korea
(apprec/deprec) & European exports to Korea will (incr/decr).
interest rates are increasing faster in Zambia 7. If interest rates
are increasing faster in Zambia than in Spain, Zambian
KwachiZambias the Zambian Kwachi will (appreciate /depreciate) and
Zambias imports from Spain imports from Spain will
(increase/decrease). more Thai bahts are required to buy a dollar
1. If more Thai bahts are required to buy a dollar, baht then the
baht has (appreciated/depreciated), & Thai exports to the U.S.
Thai exports to the U.S. should (increase/decrease). L atvias
demand for U.S. iF uzzy iW uzzies decrease 2. If L atvias demand
for U.S. iF uzzy iW uzzies decrease, Latvias Lat Latvias then
Latvias Lat will (apprec/deprec) & Latvias imports imports from
the U.S. will (increase/decrease). in. rates are decreasing faster
in S.Korea [4 % ] 3. If in. rates are decreasing faster in S.Korea
[4 % ] Korean won than in Cuba[8%], the Korean won will (appr/depr)
Koreas exports to Cuba & Koreas exports to Cuba will
(increase/decrease ). Slide 13 Korea buys 2 million fewer American
autos 1. If Korea buys 2 million fewer American autos dollarour the
dollar would (appreciate/depreciate) & our exports to Korea
exports to Korea would (increase/decrease). U.S. interest rates
decrease faster 2. If U.S. interest rates decrease faster than
dollar Haitis, the dollar would (appreciate/depreciate) & our
imports our imports would (increase/decrease). prices are dropping
more in Mexico 3. If prices are dropping more in Mexico than peso
in the U.S., the peso will (appreciate/ depreciate ) Mexicos
exports and Mexicos exports will (increase/decrease). U.S. growth
rate is faster than that 4. If the U.S. growth rate is faster than
that of ChinadollarU.S. of China, the dollar will
(appreciate/depreciate) and U.S. exports to China exports to China
will (increase/decrease). dollar price of the renminbi increases 5.
If the dollar price of the renminbi increases, the dollarour
imports dollar has (appreciated/depreciated) and our imports from
China from China will (increase/decrease). Zimbabwe wants tobuy 3
million American iFuzzy iWuzzys 6. If Zimbabwe wants to buy 3
million American iFuzzy iWuzzys, dollarour imports from the dollar
(appreciates/depreciates) and our imports from Zimbabwe Zimbabwe
should (increase/decrease). bouti price of the dollar
increasesbouti 7. If the bouti price of the dollar increases the
bouti will their exports (appreciate/depreciate ) and their exports
will (increase/decrease). Slide 14 Djibouti buys 4 mil. more U.S. i
Fuzzy iW uzzies 1. If Djibouti buys 4 mil. more U.S. i Fuzzy iW
uzzies dollar our the dollar would (appreciate/depreciate) &
our exports to Djibouti exports to Djibouti would
(increase/decrease). U.S. interest rates are increasing f aster 2.
If U.S. interest rates are increasing f aster dollar than Cubas,
the dollar would (appr/depr) & our imports our imports from
Cuba would (incr/decr). prices are increasing more in Canada 3. If
prices are increasing more in Canada than Canadian l oonie in the
U.S., the Canadian l oonie will (appr/depr) Canadas exports and
Canadas exports will (increase/decrease). U.S. growth rate is
slower than that 4. If the U.S. growth rate is slower than that of
ChinadollarU.S. of China, the dollar will (appreciate/depreciate)
and U.S. exports exports to China will (increase/decrease). dollar
price of the renminbi decreases 5. If the dollar price of the
renminbi decreases, the dollarour dollar has
(appreciated/depreciated) and our imports imports from China will
(increase/decrease). Congo wants to buy 2 million American iPiggy
iWiggies 6. If the Congo wants to buy 2 million American iPiggy
iWiggies, dollarour imports from the dollar
(appreciates/depreciates) and our imports from the Congo the Congo
should (increase/decrease). euro price of the dollar decreaseseuro
7. If the euro price of the dollar decreases the euro will their
exports (appreciate/depreciate ) and their exports will
(increase/decrease). Slide 15 inflows outflowsMeasure of money
inflows and outflows between the U.S. and the Rest of the World
(ROW). CREDITS Inflows are referred to as CREDITS DEBITS Outflows
are referred to as DEBITS Balance of Payments 3 accountsBalance of
Payments is divided into 3 accounts. Current Account the three nets
Current Account transactions that involve the three nets, net
exports, net investment and net transfers Capital/Financial
Capitalnet debt forgivenessFinancial net purchases of real and
financial assets Capital/Financial Account [Capital Account is net
debt forgiveness and Financial Account is net purchases of real and
financial assets] Official Reserves Account Official Reserves
Account net foreign currency [foreign currency holdings of the Fed]
Slide 16 recorded twiceEvery transaction in the balance of payments
is recorded twice in accordance with standard accounting practice.
John Deereexports $50 million Ex. U.S. manufacturer, John Deere,
exports $50 million worth of farm equipment to Ireland. credit of
$50 millionA credit of $50 million to the current account. ( - $50
million worth of farm equipment or physical assets). debit of $50
millionA debit of $50 million to the capital/financial account. ( +
$50 million worth of Euros or financial assets). the two
transactions offset each other balance of payments should all ways
equal zeroTheoretically Notice that the two transactions offset
each other. Theoretically, the balance of payments should all ways
equal zeroTheoretically IN OUT Slide 17 worry about the 1 st half
of the transaction export of farm equipment as a credit (inflow of
dollars)Lucky for you, in AP Macroeconomics we only worry about the
1 st half of the transaction. We simplify and see the export of
farm equipment as a credit (inflow of dollars) to the current
account. Why then, did I mention double entry bookkeeping? current
account andcapital/financial account are intrinsically linked
together and balance each other To help you understand that the
current account and capital/financial account are intrinsically
linked together and help balance each other? Yes, thats it! IN OUT
Slide 18 Net Exports or Balance of TradeNet Exports or Balance of
Trade Exports of Goods/Services Import of Goods/Services
Exportscredit Exports create a credit to the balance of payments
Importsdebit Imports create a debit to the balance of payments N et
I nvestment I ncome [Interest, dividend, rent & profit income]N
et I nvestment I ncome [Interest, dividend, rent & profit
income] minus Interest, dividend, and profit income earned by
Americans abroad minus the same income paid to foreigners. minus
Ex. P ayments to A merican b asketball players p laying for E
uropean teams minus payments to M anu Ginobli, Yao Ming, P au
Gasol, S teve N ash and Dirk playing in the U.S. Net Transfers
Foreign aid, pensions, money sent back home, etc. Ex. Mexican
migrant workers send money to family in Mexico. [Mexican workers
send $24 billion back to Mexico.] Capital Accountdebt
forgivenessFinancial Account Capital Account [net debt forgiveness]
& Financial Account [foreign p urchase real & financial
assetsforeign real & financial assets of U.S. real &
financial assets & U.S. purchase of foreign real &
financial assets.] MVP Slide 19 Balance of PaymentsBalance of
Payments sum of all the transactions that take place between U.S.
residents and the residents of all foreign nations. Current
Account, Capital/ Financial Account, and the Official
Reserves.There are three components: the Current Account, the
Capital/ Financial Account, and the Official Reserves. Current
Accountfour thingsThe Current Account includes [3 nets] four things
: Goods1. Goods [balance on goods (merchandise)] Services2.
Services [balance on goods and services] Net investment3. Net
investment income [interest, dividend, & profit income] Net
transfers4. Net transfers [foreign aid, pensions, money sent back
home, etc.] Capital and Financial Accountthree itemsThe Capital and
Financial Account includes three items : Balance on capital
accountdebt forgiveness1. Balance on capital account [net debt
forgiveness] Foreign purchases of U.S. assets2. Foreign purchases
of U.S. assets [real or financial] in U.S. U.S. purchases of
foreign assets3. U.S. purchases of foreign assets [real or
financial] abroad. difference between these two accounts balance of
payments.The difference between these two accounts is the balance
of payments. should balanceThey should balance. official reserves
will be used to balance themIf not, official reserves will be used
to balance them. export[a + here means we will export a stock of
foreign money ($s will enter the U.S.)] import[a here means we will
import a stock of foreign money ($s will exit the U.S.)] Net
Exports FinancialAccount Slide 20 parachuteCurrent Account
parachute factory Capital Account [If you bought a parachute from a
factory in GermanyCurrent Account] [If you bought a parachute
factory in Germany capital investment, so Capital Account ] Current
Account [trade in currently produced goods, svcs, net investment
& transfers] goods exports (1) U.S. goods exports$+1,046 goods
imports (2) U.S. goods imports..... -1,563 goodsvisibles$-517 (3)
Balance on goods [visibles]....$-517 exports of services (4) U.S.
exports of services [shipping, insur., tourists, bank.] +509
imports of services (5) U.S. imports of services...- 371 services
[invisibles]+ 138 (6) Balance on services
[invisibles]..................................+ 138 goods and
services-737 (7) Balance on goods and services...-737 Net
investment (8) Net investment income (income earned for svc of
exported capital [money] [Profits received from overseas investment
(interest, dividends, and rents)] + 89 Net transfers (9) Net
transfers (gifts given to the indivs, foreign aid, pensions, etc.)
- 130 Balance on current account-420 (10) Balance on current
account..-420 Capital Accountdebt forgiveness Capital Account [a
net account that mainly measures debt forgiveness] (11) Balance on
capital account ......-3 Financial Account Financial Account
[buying/selling of physical & financial assets (stock/bonds)]
Foreign purchases of assets (12) Foreign purchases of assets in the
U.S. .. +548 U.S. purchases of assets abroad (12) U.S. purchases of
assets abroad. -125 Balance on financial account+423 (13) Balance
on financial account...+423 (14) Balance on capital and financial
account.+420 $0 $0 $0 Slide 21 _____ 1. Joe buys $30,000 worth of
stock from Koreas Hyundai. _____ 2. France buys bombers and machine
guns manufactured in N. Carolina. _____ 3. Toyota builds a Tundra
manufacturing plant in San Antonio, TX. _____ 4. An American
purchases a Japanese made Toyota Prius. _____ 5. Boeing sells a new
787 to France. _____ 6. An ARAMCO employee working in Saudi Arabia
sends most of his pay to his family in Plano, TX. _____ 7.
Americans donate $100 million in earthquake relief to Chinese
relief organizations. _____ 8. The U.S. exports 50 tons of steel to
Ireland. _____ 9. Ford buys three manufacturing plants in Taiwan.
_____ 10. Japanese banks purchase U.S. Treasury Bonds. Current
Account - something is physically transferred to another country.
Capital/Financial Acct nothing is physically transferred but
ownership of the real [land/factory] or financial asset
[stocks/bonds]. the real [land/factory] or financial asset
[stocks/bonds]. Cap/Finan. Cur.Acct Cap/Finan. Cur.Acct Cur.Acct
Cur.Acct Cur.Acct Cur.Acct Cap/Finan. Cap/Finan. Slide 22 (16%) a
country has a current account deficit (16%) 7. If a country has a
current account deficit, which of the following must be true? a. It
must also show a deficit in its capital/financial account. b. It
must show a surplus in its capital/financial account. c. It must
increase the purchases of foreign goods and services. d. It must
increase the domestic interest rates on its bonds. e. It must limit
the flow of foreign capital investment. Capital/Financial Acct
Current=Short term Capital=Long term Current AcctCapital/Financial
Acct Current Acct+Capital/Financial Acct = 0 Slide 23 2. Balance of
payments accounts record all of a countrys international
transactions during a year. (a)Two major subaccounts in the balance
of payments accounts are the current account and the
capital/financial account. In which of these subaccounts will each
of the following transactions be recorded? (i) A United States
resident buys chocolate from Belgium. (b) How would an increase in
the real income in the United States affect the United States
current account balance? Explain. (ii) A United States manufacturer
buys computer equipment from Japan. Answer to 2. (a) (i): Answer to
2. (a) (i): Chocolate from Belgium would go in the current account
as it includes the import of goods. Chocolate from Belgium would go
in the current account as it includes the import of goods. Answer
to 2. (a) (ii): Answer to 2. (a) (ii): Computer equipment by a U.S.
manufacturer would also be classified as an import so it would also
go on the current account. Computer equipment by a U.S.
manufacturer would also be classified as an import so it would also
go on the current account. Answer to 2. (b): Answer to 2. (b): An
increase in real income would make U.S. citizens richer. We would
buy more imports, An increase in real income would make U.S.
citizens richer. We would buy more imports, decreasing net exports,
and increasing the deficit on the current account. decreasing net
exports, and increasing the deficit on the current account. 1 pt
current account 2 pts - 1 pt imports increase or Xn decrease. 1 pt
current account balance decreases or current account balance goes
into deficit. 1 pt current account balance decreases or current
account balance goes into deficit. Slide 24 U.S. Goods
export....+$100 U.S. Goods imports...-80 U.S. Service exports...
+40 U.S. Service imports.-90 Net Investment income...+20 Net
transfers...-15 Balance on capital account .-5 Foreign purchase of
assets in the U.S+45 U.S. purchases of assets abroad..-10 Official
Reserves. -5 1. T he U.S. is experiencing a balance on goods
(deficit/surplus) of ($10/$20/$30 ) billion. 2. The U.S.s balance
on goods & services is a (deficit/surplus) of ($30/$40)
billion. 3. T he U.S.s balance on the current account is a
(deficit/surplus) of ($25/$35). 4. The balance on the capital and
financial account is a (surplus/deficit) of ($25/$30/$40). 5. The
U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[dont include official reserves here] 6. The official reserves
account indicates the U.S. (imported/exported) $5 billion of its
stock of foreign reserves. + export [A + here means we will export
a stock of foreign money ($s will enter U.S.)] import [A here means
we will import a stock of foreign money ($s will exit U.S.)] Slide
25 1. The U.S. is experiencing a balance on
goods(deficit/surplus)of ($10/$20/$30 ). 2. T he U.S.s balance on
goods & services is a (deficit/surplus) of ($30/$40) bil. 3.
The U.S.s balance on the current account is a (deficit/surplus) of
($25/$35). 4. The balance on the capital and financial account is a
(surplus/deficit) of ($25/$30/$40). 5. The U.S. is experiencing a
balance of payments (surplus/deficit) of $5. [dont include official
reserves here] 6. The official reserves account indicates the U.S.
(imported/exported) $5 billion of its stock of foreign reserves. +
export [A + here means we will export a stock of foreign money ($s
will enter U.S.)] import [A here means we will import a stock of
foreign money ($s will exit U.S.)] U.S. Goods export....+$100 U.S.
Goods imports...-80 U.S. Service exports... +40 U.S. Service
imports.-90 Net Investment income...+20 Net transfers...-15 Balance
on capital account .-5 Foreign purchases of assets in the U.S +45
U.S. purchases of assets abroad -10 Official Reserves. -5 $20 -$30
G/S Current Account - $25 $30 Balance on Goods Bal. on Curr. Acct.
Balance on Cap. & Financial Acct. - $ 50 $5 $5 Balance of
Payments Slide 26 A nswer the next 8 questions[33-40] 33. The
balance on goods is a (deficit/surplus) of ($25/$30/$40) billion.
34. The balance on goods and services is a (deficit/surplus) of
($25/$45/$55) billion 35. The balance on the current account is a
(deficit/surplus) of ($20/$25/$30) billion. 36. The balance on the
capital account is a (deficit/surplus) of ($10/$20/$30) billion.
37. This country is experiencing a balance of payment
(surplus/deficit) of ($10/$20).[Do not include official reserves]
38. The official reserves account indicates this country
(imported/exported) $10 billion of its stock of foreign reserves.
39. If the foreign purchases of U.S. assets had been +$45 instead
of +$30, then this country would have to (import/export) a $5
billion stock of foreign currency & official reserves would
read (-$5/+$5). 40. The current account, capital account, &
official reserves must always net to (0/50/100). Goods
exports...+$45 Goods imports.-$75 Service exports.+$15 Service
imports..-$10 Net investment income..-$10 Net Transfers +$15
Balance on capital account. -$5 Foreign purchases of U.S.
Assets..+$30 U.S. purchases of assets abroad -$15 Official
Reserves+$10 41. We give (inpayments/outpayments) for imports &
get (inpayments/outpayments) for exports. 42. U.S. export
transactions create foreign (demand for/supply)
dollars[appreciation] & this satisfaction (increases/decreases)
the supplies of foreign monies held by U.S. banks [depreciation].
43. If we brought home our 40,000 troops in South Korea, this would
contribute to a U.S. balance of payments (surplus/deficit). 44.
U.S. tourists traveling in large numbers to Europe would contribute
to a U.S. balance of payments (surplus/deficit). 45. The U.S.
balance of payments show the balance between (all/some of) the
payments the U.S. receives from foreign countries and (all/some of)
the payments which we make to them. 46. If a nations merchandise
exports are $60 billion, while its merchandise imports are $70
billion, this nation is experiencing a balance of trade
(surplus/deficit) of $10 billion. 47. The (current/capital) account
includes trade in currently produced goods/services[X-M]. 48. The
(current or capital/financial) account reflects flows of real
[land, factories, etc.] and financial assets [securities]. 49.
There (must/must not) always be a balance of a nations total
international payments. [includes official reserves] 50. A deficit
on the current account tends to cause a (deficit/surplus) on the
capital account. 17 Ed. -$20 $10 $10 -$10 -$10 $45 $25 $25 $5 $5
-$5 Slide 27 Review for Global Trade I have a comparative
advantage. Slide 28 Slide 29 Brazils DCC Perus DCC Crusts Pastries
Pastries 5 0 10 0 5 Crusts 10 1C = __ P __ C = 1P 1C = __P 1 P =
__C Terms of Trade 1C = ____ Peru will produce Crusts and trade
with Brazil for 1 Pastry [better than P] Brazil will produce
Pastries & trade with Peru for 1 Crust [better than C] 1P 2 2
_______ has an absolute advantage [ absolutely more ] in pastries.
_______ has an absolute advantage [ absolutely more ] in crusts.
Brazil Peru [or anywhere between P & 2 P] [like , 1 , 1 , or 1
P] 5 2 5 *Both Brazil and Peru are able to consume (CPC) beyond
their PPCs. 10 10 Slide 30 absolute advantage in both commodities
6. (Djibouti/Mexico) has an absolute advantage in both commodities.
comparative advantage in producing wheat 7. (Djibouti/Mexico) has a
comparative advantage in producing wheat. absolute disadvantage in
both commodities 8. (Djibouti/Mexico) has an absolute disadvantage
in both commodities. comparative advantage in caviar 9.
Djibouti/Mexico) has a comparative advantage in caviar. Trade1
caviar wheat 10. Trade can occur between the two when 1 caviar is
exchanged for(1/2.5/3) wheat. Terms of Trade: 1S = ___ A Product A
B C D E A vocados 0 30 33 60 90 S oybeans 30 20 19 10 0 DCC: 1S
costs ___A ___ S costs 1A ___ S costs 1A Product A B C D E A
vocados 0 20 24 40 60 S oybeans 15 10 9 5 0 DCC: 1S costs ___A ___
S costs 1A ___ S costs 1A Mexicoopportunity cost of 1S 1. In
Mexico, the opportunity cost of 1S is (1/3 or 4 or 5 ) avocados.
Mexico 2. If these 2 nations specialize, Mexico will produce
(avocados/soybeans) & the U.S. U.S. will produce
(avocados/soybeans). Mexicoabsolute disadvantage 3. Mexico has an
absolute disadvantage in (avocados only/soybeans only/both avocados
and soybeans). both produced at combination C 4. If both produced
at combination C prior to specialization, what would be the gains
after tradeavocadossoybeans gains after trade? (0/3/2/10) tons of
avocados and (1/3/2/10) tons of soybeans. terms of
tradesoybeansavocados 5. The terms of trade would be 1 ton of
soybeans for (1/3/4/3.5) tons of avocados. 43 3.5 015 60 Avocados
90 030 Soybeans Mexicos PPF (tons) U.S. PPF (tons) 1/3 DCC:
Djibouti 1C costs ___ W ___C costs 1W 2 DCC: Mexico 1C costs ___ W
___C costs 1W 3 1/3 Djibouti Djibouti Caviar 10 hours Wheat 5 hours
Mexico Mexico Caviar 18 hours Wheat 6 hours Terms of Trade: 1C =
___ W 2.5 Soybeans Avocados 24 A 33 A 57 A 19 S 9 S 28 S Slide 31
inputshourssmaller numberabsolute And with inputs (hours), the
smaller number indicates absolute advantagemore efficient
advantage; that country is more efficient because it can produce
absolutely faster a good absolutely faster the same output.
Absolute Advantage [Outputs v. Inputs outputsquantitylarger
numberabsolute advantage absolutelymore more efficient Absolute
Advantage [Outputs v. Inputs] Remember that with outputs or
quantity, the larger number indicates absolute advantage; that
country can produce absolutely more with the same inputs, and is
more efficient. ProductMarket ResourceMarket Slide 32 Product
Market [outputs] Product Market [outputs] Country Guns Butter
Rabbit 40 units 120 units Wabbit 20 units 40 units Resource Market
[inputs] Resource Market [inputs] Country Guns Butter Rabbit 40
hours 120 hours Wabbit 20 hours 40 hours W hat country has an
absolute advantage in guns? W hat country has an absolute advantage
in guns? Rabbit Wabbit Why does Rabbit have an absolute advantage
in guns ? Why does Wabbit have an absolute advantage in guns ?
Rabbit can produce absolutely more guns than Wabbit [40 units v. 20
units] Wabbit can produce guns absolutely faster than Rabbit [20
hours v. 40 hours] Rabbit W hat country has a comparative advantage
in guns? W hat country has a comparative advantage in guns? Wabbit
Rabbit Wabbit can produce guns at a lower opportunity cost [2
butters v. 3 butters] Rabbit can produce guns at a lower
opportunity cost [1/3 butter v. 1/2 butter] Rabbit 1 G = 3 B 1/3 G
= 1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1/3 B = 1G Wabbit 1
B = 2 G 1/2 B = 1G Wabbit Rabbit Wabbit Lets change inputs into
outputs. Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G
Output v. Input Slide 33 Exports[Decreased] Imports[Increased]
Strong Dollar As Interest Rates Rose... [all the way to 13%] 81 82
83 84 85 Exports decreased. Agricultural exports dropped from $44
billion to $28 billion as foreign agricultural goods became
cheaper. 81 82 83 84 85 Imports increased as they became cheaper.
The dollar got stronger and stronger Slide 34 50 Quantity of
Dollars 100 P rice $S$$S$ D1$D1$D1$D1$ [Exchange Rate: $1 = Y100 ]
D A A D D2D2D2D2 150 E1E1E1E1 E2E2E2E2 E3E3E3E3 D3D3D3D3
Yendepreciates Yenappreciates looking for $s
Appreciation/Depreciation M X X M Taste [products/assets] Interest
Rates Price Level Growth Rate Currency Price Currency Price + - $s
looking for S$S$S$S$ $D$$D$ # of Dollars 100 150 50 S$S$S$S$
S$S$S$S$ D A A D /$ $1.50 # of S1S1S1S1 $/ S2S2S2S2 D DD A Japan
will supply more yen for dollars. E2E2E2E2 E2E2E2E2 E2E2E2E2
S2S2S2S2 $1.50 D Japan will supply less yen for d ollars. A U.S.
will supply fewer $ s for . U.S. will supply more $ s for .
E2E2E2E2 Slide 35 Increase in taste 1. Increase in taste [more
demand for a countrys products or assets] Increase in interest
rates 2. Increase in interest rates [Overseas investors increase
their investments there.] Decrease in price level 3. Decrease in
price level [overseas buyers want to buy our cheaper goods.]
Decrease in growth rate 4. Decrease in growth rate [ A countrys
declining economy results in them buying less from other countries;
decreasing demand for their currency and thus appreciating the
declining economys currency] 5. Decrease in the price of a currency
relative to the other Slide 36 Costa Rica buys 1 mil. fewer Dell
computers 1. If Costa Rica buys 1 mil. fewer Dell computers dollar
our the dollar would (appreciate/depreciate) & our exports to
Costa Rica exports to Costa Rica would (increase/decrease). U.S.
interest rates decrease faster 2. If U.S. interest rates decrease
faster than baht Thailands, the baht would (appreciate/depreciate)
& their imports their imports would (increase/decrease). prices
are dropping more in Mexico 3. If prices are dropping more in
Mexico than peso in the U.S., the peso will (appreciate/ depreciate
) Mexicos exports and Mexicos exports will ( increase /decrease).
Afghanistans growth rate is faster than that of China 4. If
Afghanistans growth rate is faster than that of China,
AfghaniAfghanistans the Afghani will (appreciate/depreciate) and
Afghanistans exports exports to China will (increase/decrease).
dollar price of the Kwacha [Zambia] increases 5. If the dollar
price of the Kwacha [Zambia] increases, dollarour the dollar has
(appreciated/depreciated) and our imports imports from Zambia will
(increase/decrease). buy 3 million more American iDoggy iWoggies 6.
If Haiti wants to buy 3 million more American iDoggy iWoggies,
dollarour imports from the dollar (appreciates/depreciates) and our
imports from Haiti Haiti should (increase/decrease). quetzalprice
of the dollar increases 7. If the quetzal (Guatemala) price of the
dollar increases the quetzal their imports quetzal will
(appreciate/depreciate ) and their imports will
(increase/decrease). Slide 37 Djibouti buys 2 mil. fewer U.S.
iFuzzy iWuzzies 1. If Djibouti buys 2 mil. fewer U.S. iFuzzy
iWuzzies dollar the dollar would (appreciate/depreciate) & our
exports to Djibouti would (increase/decrease). U.S. interest rates
are increasing faster 2. If U.S. interest rates are increasing
faster dollar than Ghanas, the dollar would (appr/depr) & our
imports our imports from Ghana would (incr/decr). prices are
increasing more in Eritrea 3. If prices are increasing more in
Eritrea than Eritrean birr in the U.S., the Eritrean birr will
(apprea/deprea) Eritreas imports and Eritreas imports will
(increase/decrease). U.S. growth rate is faster than that of
Botswana 4. If the U.S. growth rate is faster than that of
Botswana, dollarU.S. the dollar will (appreciate/depreciate) and
U.S. exports exports to Botswana will (increase/decrease). dollar
price of the Croatian kuna increases 5. If the dollar price of the
Croatian kuna increases, the dollar dollar has
(appreciated/depreciated) and our imports imports from Croatia will
(increase/decrease). buy 6 million Lindsay Lohan 6. If the Congo
wants to buy 6 million Lindsay Lohan dollsdollar dolls, the dollar
(appreciates/depreciates) and our imports from the Congo should
(increase/decrease). markka (Finland) price of the dollar increases
7. If the markka (Finland) price of the dollar increases the markka
markka will (appreciate/depreciate ) and their imports will
(increase/decrease). Lohan Doll Slide 38 1. The U.S. is
experiencing a balance on goods(deficit/surplus)of ($10/$20/$30 ).
2. T he U.S.s balance on goods & services is a
(deficit/surplus) of ($30/$40) bil. 3. The U.S.s balance on the
current account is a (deficit/surplus) of ($25/$35). 4. The balance
on the capital and financial account is a (surplus/deficit) of
($25/$30/$40). 5. The U.S. is experiencing a balance of payments
(surplus/deficit) of $5. [dont include official reserves here] 6.
The official reserves account indicates the U.S.
(imported/exported) $5 billion of its stock of foreign reserves. +
export [A + here means we will export a stock of foreign money ($s
will enter U.S.)] import [A here means we will import a stock of
foreign money ($s will exit U.S.)] U.S. Goods export....+$100 U.S.
Goods imports...-80 U.S. Service exports... +40 U.S. Service
imports.-90 Net Investment income...+20 Net transfers...-15 Balance
on capital account .-5 Foreign purchases of assets in the U.S +45
U.S. purchases of assets abroad -10 Official Reserves. -5 $20 -$30
G/S Current Account - $25 $30 Balance on Goods Bal. on Curr. Acct.
Balance on Cap. & Financial Acct. - $ 50 $5 $5 Balance of
Payments Slide 39 Slide 40 Quantity of Dollars 50 100 P rice
D1$D1$D1$D1$ [Exchange Rate: $1 = Y100 ] D A A D D2D2D2D2 150
E1E1E1E1 E2E2E2E2 E3E3E3E3 D3D3D3D3 Yendepreciates Yenappreciates
looking for $s Appreciation/Depreciation M XM XM XM X X M Taste
[products/assets] Interest Rates Price Level Growth Rate (Y)
Currency Price Currency Price + - $s looking for /$ $S$$S$ Slide 41
increase in taste 1. Show how an increase in taste for Japanese
cars would affect the market for the Yen and the Dollar. # of Yen #
of Dollars 2. How would an increase in Mexicos real interest rate
real interest rate affect the value of the Peso and the value of
the Euro? high inflation 3. How would high inflation in South Korea
affect the market for the Won and the Dollar? economic 4. How would
a U.S. economic expansion expansion affect the value of the Dollar
and the value of the Yen? e1 # of Pesos # of Euros # of Won # of
Dollars # of Yen D D D D D D D D SS S S S S S S $ Price of Yen Yen
Price of $ Euro Price of Peso Peso Price of Euro $ Price of Won Won
Price of $ Yen Price of $ $ Price of Yen $1 100 P16 100 $1 W1,030
$1 100 Slide 42 change in consumer 5. There is a change in consumer
preferences for U.S. Goods preferences [Taste] for U.S. Goods by
the Japanese. # of Dollars # of Yen Interest Rates in the U.S. 6.
Interest Rates in the U.S. NCREASE INCREASE relative to the
Interest Rates in Japan. change in consumer 7. There is a change in
consumer preferences Taste for Japanese preferences [ Taste ] for
Japanese cars, computers and airplanes cars, computers and
airplanes by Americans. U.S. economy 8. The U.S. economy is in a
strong recovery after the GREAT GDP RECESSION. GDP, or National Y,
HIGHER in the U.S. is now HIGHER and more Americans have more DI.
e1 # of Dollars # of Yen # of Dollars # of Yen # of Dollars # of
Yen D D D D D D D D SS S S S S S S $1 100 $1 100 $1 price of $ $
price of $1 $ price of 100 price of $
