c15 international and balance of payment issues in the macro economy

Currency exchange rate
How much of one currency can be exchanged for another or the price of one currency in terms of another.



trade-weighted dollar
An index of the weighted exchange value of the U.S. dollar versus the currencies of a broad group of major U.S. trading partners.


Currency appreciation
One currency can be exchanged for more units of another currency or the value of R increases.
Currency depreciation
One currency can be exchanged for fewer units of another currency or the value of R decreases.
real exchange rate
The nominal exchange rate times the ratio of the domestic price level to the foreign price level.
nominal exchange rate
The value at which one currency can be exchanged for another, or R.


balance of trade
The relationship between a country’s export and import spending, which can be positive if there is a trade surplus (exports
exceed imports) or negative if there is a trade deficit (imports exceed exports).


X = f(Y, Y * , R) 0,+，—       M = f（Y, R） +，+          F = f（Y, Y * , R） —，+，—

where
X = export spending
M = import spending
F = net export spending 1export minus import spending = X- M）
Y * = income in the rest of the world
Y = income in the United States
R = exchange rate as defined above （units of foreign currency per dollar）


1. Negatively related to income in the United States (an increase in U.S. income causes imports to increase, but has no effect on exports and, therefore, causes net exports to decrease)
2. Positively related to income in the rest of the world (an increase in foreign income has no impact on U.S. imports, but causes U.S. exports to increase and, therefore, net exports to increase)
3. Negatively related to R (an increase in R will cause exports to decrease, imports to increase, and, therefore, net exports to decrease)


E = Y
C + I + G + X — M = C + S + T
I + G + X = S + T + M         injections/ outflows   into/from circular flow
X — M = (S - I) + (T - G)     the right side shows the public and private savings
where
E = aggregate expenditure
Y = real income
C = consumption expenditure
I = investment expenditure
G = government expenditure
X = export spending
M = import spending
S = saving
T = total taxes


trade surplus
Occurs when a country’s export spending exceeds the spending on its imports.
Capital outflow (k o )
A lending of a country’s savings that occurs when the country has a trade surplus and its citizens purchase real and financial assets from abroad.
trade deficit
Occurs when a country’s import spending exceeds the spending on its exports.
Capital inflow (k i )
Borrowing from another country that occurs when the country has a trade deficit and its citizens sell real and financial assets to foreigners.
net capital flow (K N = k i – k o )
The difference between capital inflows and outflows, which must match the trade balance, or export spending minus import spending.


balance of payments (BP) accounting system
A comprehensive measure of all economic activity between a country and the rest of the world.

Current account
A measure of the current flows of goods, services, investment income, and unilateral transfers between a country and the rest of the world.

net investment income
The difference between the interest income or receipts earned on investments in the rest of the world by the residents of a given country and the payments to foreigners on investments they have made in the given country.

Unilateral transfers
Flows of goods, services, and financial assets, such as foreign aid, from one country to another in which nothing of significant
economic value is received in return.


financial account
A measure of the change in the stock of real assets (buildings, property, etc.) and financial assets (bank deposits, securities, etc.) held by a country’s residents in foreign countries and by foreigners in the given country.


revenue or t-account
An accounting statement that shows expense-generating items on the left-hand or debit side and income-generating items on the right-hand or credit side.

statistical discrepancy (SD)
The imbalance between the financial and current accounts in the balance of payments statement or between payments and receipts in the revenue or T-account that arises from inefficient data collection.


BP = (X - M ) - (k i - k o ) = 0


Q d $ = f(X, k i )
Q s $ = f(M, k o )


Q d $ = f(R,Y Japan ,r US >r Japan )   —，+，+
Q s $ ∙ f（R,Y US ,r US < r Japan）+，+,+


X = f(Y Japan ,R)  +，—         M = f(Y US , R)  +，+           k i = f(r US >Japan ) +   k o = f(r US < Japan )  +

Equilibrium in the Foreign Exchange Market

flexible exchange rate system
A system in which currency exchange rates are determined strictly by the forces of demand for and supply of the currencies
and there is no intervention by any country’s central bank in order to influence the level of exchange rates.


fixed exchange rate system
A system in which the central banks of various countries intervene in the foreign exchange market to maintain or stabilize currency exchange rates.
gold standard
A fixed rate system in which central banks agree to buy and sell gold to keep exchange rates at a given level.
Managed float
A fixed rate system in which central banks buy and sell foreign currency to maintain exchange rates at a given level.

international Monetary fund (iMf)
An international financial organization created at the Bretton Woods conference in 1944 that helps coordinate international
financial flows and can arrange short-term loans between countries.
World bank
An international financial organization created at the Bretton Woods conference in 1944 that helps developing countries obtain
low-interest loans.


reserve assets
Assets, including foreign currencies and gold certificates, that central banks use to maintain exchange rates between countries at a given level or in a predetermined range.


sterilized intervention
Actions taken by a country’s central bank to prevent balance of payments policies from influencing the country’s domestic money supply.