Bài giảng Macro - Chapter 18 Exchange rates and the balance of payments

CHAPTER 18EXCHANGE RATESAND THE BALANCE OF PAYMENTSSLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGEIn this chapter you will learnWhat determines the supply of and demand for a nation’s currencyAbout a nation’s balance of paymentsWhat a flexible exchange rates system is and its effects on the domestic economyWhat a fixed exchange rates system is and its effects on the domestic economyAbout the history of the world’s international exchange-rate systemsChapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate SystemsFinancing International TradeAssume $2 = £11. $300,000 in Canadian telecommunications equipment purchased by a British buyer for £150,0002. £150,000 cheque drawn on British bank to pay for equipment3. £150,000 cheque is exchanged for $300,000 at a Canadian bank4. Canadian bank sends £150,000 cheque to London bank for future transactionsPoints to RememberCanadian exports create:a foreign demand for Canadian $ an increase in the supply of foreign currency owned by Canadian banksPoints to RememberCanadian imports:create a domestic demand for foreign currenciesreduce the supplies of foreign currencies held by Canadian banksPoints to RememberCanadian exports supply the foreign currencies needed to “pay for” importsDemand for & supplies of foreign currencies also arise from transactions involving services & payment of interest & dividends on foreign investmentsChapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate SystemsThe Canadian balance of payments shows the balance between all the payments that Canada receives from foreign countries &all the payments which we make to themThe Balance of PaymentsCurrent Accountshows the flows resulting from imports & exports of goods & servicesthe trade balance is the net amount of imports & exports of goods onlythe balance on goods & services includes services as well trade in services, investment income & transfers are included to get the current account balancenormally a deficitThe Canadian Balance of Paymentsin 2000 (billions of dollars) Exports Imports BalanceCurrent Account Merchandise 417.7 - 363.2 +54.5Services 56.2 - 62.8 - 6.6Balance on Goods and Services +47.97. Net Investment Income - 30.38. Net Transfers + 1.39. Current Account Balance +18.9balance of tradeTable 18-1Capital Accountshows capital inflows & outflowspurchase or sale of real or financial assetsofficial settlements accountThe Canadian Balance of Paymentsin 2000 (billions of dollars) BalanceCapital Account 10. Capital inflows +115.5* 11. Capital outflows - 132.1* 12. Capital account balance - 16.6 Official settlements account13. Official international reserves - 2.3Balance of payments $ 0*includes one-half of a $2.3 billion statistical discrepancybalance of payments surplusTable 18-1Payments Deficits & SurplusesA drawing down of official international reserves measures a nation’s balance of payments deficitA building up of official reserves measures a balance of payments surplusGLOBAL PERSPECTIVE 18.1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1815Chapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate SystemsFlexible Exchange RatesRates by which national currencies are exchanged are determined by demand & supplyPQDThe Market for Foreign Currency (Pounds)Dollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.18Quantity of poundsFigure 18-2Macroeconomics, Chapter 18PQDSdollar price of pounds is determined by demand & supplyDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.19Quantity of poundsThe Market for Foreign Currency (Pounds)Figure 18-2Macroeconomics, Chapter 18PQDS2Dollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.20Quantity of poundsQ1The Market for Foreign Currency (Pounds)Figure 18-2Macroeconomics, Chapter 18PQDSPoundappreciatesDDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.21Quantity of poundsThe Market for Foreign Currency (Pounds)Figure 18-22Q1Macroeconomics, Chapter 18PQDSDPounddepreciatesDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.22Quantity of poundsThe Market for Foreign Currency (Pounds)Figure 18-22Q1Macroeconomics, Chapter 18Determinants of Exchange RatesChanges in TastesRelative Income ChangesRelative Price-Level ChangesPurchasing Power Parity TheoryRelative Interest RatesSpeculationAdvantages of Flexible Ratesautomatic adjustment to eventually eliminate balance of payments deficits or surplusesPQDSsuppose tasteschange & Canadianswant to buymore British automobilesDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.25Quantity of poundsFigure 18-32Macroeconomics, Chapter 18Adjustments Under Flexible Exchange RatesPQDSdemand for poundsincreasesDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.26Quantity of poundsFigure 18-3D2Adjustments Under Flexible Exchange RatesMacroeconomics, Chapter 18PQDSCanadian balance of payments deficitDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.27Quantity of poundsFigure 18-3D2Adjustments Under Flexible Exchange RatesabMacroeconomics, Chapter 18PQDSDollar price of 1 pound© 2002 McGraw-Hill Ryerson Ltd.28Quantity of poundsFigure 18-3D2change in the exchange rate to $3=£1would correct the deficitAdjustments Under Flexible Exchange Rates3cbaMacroeconomics, Chapter 18Flexible Exchange Rateswith a lower $, Canadians will want to import less, & the British will want to buy more Canadian goods & servicesDisadvantages of Flexible RatesUncertainty & Diminished TradeTerms of Trade ChangeInstabilityChapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate Systemsdistorted tradefavouritismrestricted choiceblack marketsFixed Exchange RatesUse of ReservesTrade PoliciesExchange Controls & RationingFixed Exchange RatesUse of ReservesTrade PoliciesExchange Controls & RationingDomestic Macroeconomic AdjustmentsChapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate SystemsExchange Rate SystemsThe Gold Standard: Fixed Exchange Rates 1879 - 1934 currency defined in goldfixed relationship between gold stock & money supply maintainedgold freely exported & importedExchange Rate SystemsGold flows resulted in fixed exchange ratesDomestic macroeconomic adjustments sometimes distastefulGold standard collapsed in the worldwide depression of the 1930sseries of devaluationsExchange Rate SystemsThe Bretton Woods System 1944-1971adjustable-peg systemInternational Monetary Fund (IMF)Maintaining pegged ratesOfficial international reservesGold salesIMF borrowingExchange Rate SystemsFundamental Imbalances: Adjusting the PegDemise of the Bretton Woods System1971: the US floated the dollarExchange Rate SystemsThe Current System: The Managed FloatG-7 Interventions In Support of the Managed Floatworld trade continues to expandsevere economic turbulence successfully weatheredConcerns with the Managed Floatexchange rate volatilitytrade imbalances persista “nonsystem”Chapter 18 TopicsFinancing International TradeThe Balance of PaymentsFlexible Exchange RatesFixed Exchange RatesInternational Exchange Rate Systems