ANALYSIS Trade & Balance of Payments Suppose the Belgian government decreases a tariff on all the automobiles it imports from abroad. A) Will each of the following groups benefit from this action? Explain. i) Belgian consumers ii) Belgian automobile manufacturers. B) Would the reduction in tariffs move each of the following toward deficit or surplus? Explain. i) Current account balance ii) Capital account balance
UNit 5.3
Imports america and Exports syrup Cars tractors mexico tomatoes canada japan summary * For each of these transactions, there are different currencies! * Each country MUST be paid in their own currency! * The buyer ( importer ) must exchange their currency for that of the seller ( exporter )
Imports america Exports and syrup Cars tractors mexico tomatoes Peso U.S. Dollar Peso Yen canada japan U.S. Dollar Canadian Dollar Canadian Dollar Peso
the Exchange rate We examine the scenario price of one currency in terms of the other currency Britain imports the new Ford Fiesta. To purchase these goods, British firms/consumer must convert their pounds into u.s. dollars at the EXCHANGE RATE! (i.e. - the price of the U.S. Dollar in British Pounds) * If one pound is worth two dollars, the exchange rate is 1 to $2 0.5 * The price of a U.S. Dollar is $2 * The price of a British Pound is The Exchange Rate depends on which cu!ency you are converting!
currency depreciation what happens if the dollar price of a british pound increases? $2 to 1 $5 to 1 MORE units of dollars are needed to buy a single unit of the other currency! The U.S. Dollar has DEPRECIATED in value relative to the british pound! * The U.S. Dollar: less purchasing power * Has Weaker in the open global market * Is
currency Appreciation what happens if the dollar price of a british pound DEcreases? $2 to 1 $1 to 2 LESS units of dollars are needed to buy a single unit of the other currency! The U.S. Dollar has APPRECIATED in value relative to the british pound! * The U.S. Dollar: More purchasing power * Has Stronger in the open global market * Is
Let s investigate graphing the foreign exchange market
POUND PER DOLLAR ER SD 2 DD Q1 This is the QDollars foreign exchange market
POUND PER DOLLAR ER SD 2 DD Q1 QDollars it measures the exchange rate betw"n two currencies
POUND PER DOLLAR ER market for the U.S. Dollar SD 2 DD Q1 QDollars the exchange rate is established by the supply & demand for a cu!ency!
POUND PER DOLLAR ER market for the U.S. Dollar SD 4 DD Q2 QDollars as exchange rate (pounds per dollar), increases... the dollar APPRECIATES
POUND PER DOLLAR ER market for the U.S. Dollar SD 0.5 DD Q3 QDollars as exchange rate (pounds per dollar), decreases... the dollar DEPRECIATES
POUND PER DOLLAR ER market for the U.S. Dollar SD Dollar Appreciates Pound Depreciates 2 Dollar Depreciates Pound Appreciates DD Q1 QDollars foreign exchange market -- HOW IT WORKS --
and last but certainly not least... exchange rate determinants
currency shifters determinants of the foreign exchange market 1. Changes in taste (Example : European tourists flock to cruise in the United States) * Europeans will need to exchange their Euros for Dollars * Demand for U.S. Dollar increases * Europeans inject their Euros into the exchange market * Supply of Euros in the exchange market increases U.S. Dollar APPRECIATES Euro DEPRECIATES
currency shifters determinants of the foreign exchange market 2. Changes in income (due to imports) (Example : US income level increases and Americans buy more Japanese imports ) * Americans will need to exchange their Dollars for Yen * Demand for the Yen increases * Americans inject their Dollars into the exchange market * Supply of Dollars in the exchange market increases U.S. Dollar DEPRECIATES Yen APPRECIATES
currency shifters determinants of the foreign exchange market 3. Changes in prices (due to imports) (Example : US price level increases relative to India and Americans move to buy cheaper Indian imports) * Americans will need to exchange their Dollars for Rupees * Demand for the Rupees increases * Americans inject their Dollars into the exchange market * Supply of Dollars in the exchange market increases U.S. Dollar DEPRECIATES Rupee APPRECIATES
currency shifters determinants of the foreign exchange market 4. Changes in interest rate (Example : US interest rates grow higher than England) * Britons will need to exchange their Pounds for Dollars * Demand for U.S. Dollar increases * Britons inject their Pounds into the exchange market * Supply of Pounds in the exchange market increases U.S. Dollar APPRECIATES Pound DEPRECIATES
let s practice!
SCENARIO British interest rates reach the highest level in the open global economy market for the * International investors will need to exchange their currency for Pounds * Demand for the British Pound increases IR U.K. Pound ER SP R2 R1 DP2 1 * The value IR of2the British Pound DP Q1 Q2 APPRECIATES Q1 Qp
SCENARIO Due to an economic boom, the national income level in the US rises market for the * American consumers will demand more imported goods U.S. dollar ER SD * Americans will need to exchange their dollars for foreign currency * Supply forirthe American Dollar 1 increases IR R1 R2 DD 2 * The value of the American Dollar DEPRECIATES Q1 SD2 Q1 Q2 QD
SCENARIO Due to outbound capital flow, prices in the American economy fall market for the * International consumers will demand more American exports * Foreigners will need to exchange their currency for U.S. Dollars * Demand for American Dollar IRthe 1 U.S. dollar ER SD R2 R1 DD2 increases IR DD 2 * The value of the American Dollar APPRECIATES Q1 Q1 Q2 QD
SCENARIO The summer season sees a huge increase in tourism to Europe market for the * International travelers will need to exchange their currency for Euros * Demand for the Euro ER SE R2 R1 increases IR EURO DE2 1 * The value IR of2the Euro DE Q1 Q2 APPRECIATES Q1 QE