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    LIPSEY - CHRYSTAL - SUMM28Visit Us at Management - Umakant.info

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    The document summarizes key aspects of international trade, balance of payments accounts, foreign exchange markets, and how exchange rates are determined. It discusses how balance of payments accounts record international transactions, the components of the current and capital accounts, how supply and demand determines exchange rates under flexible regimes, and how purchasing power parity and interest rate differentials can cause fluctuations in exchange rates from long-run equilibrium levels.

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    LIPSEY - CHRYSTAL - SUMM28Visit Us at Management - Umakant.info

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    The document summarizes key aspects of international trade, balance of payments accounts, foreign exchange markets, and how exchange rates are determined. It discusses how balance of payments accounts record international transactions, the components of the current and capital accounts, how supply and demand determines exchange rates under flexible regimes, and how purchasing power parity and interest rate differentials can cause fluctuations in exchange rates from long-run equilibrium levels.

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    LIPSEY_CHRYSTAL_SUMM28Visit Us @ Management.umakant.info

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    The document summarizes key aspects of international trade, balance of payments accounts, foreign exchange markets, and how exchange rates are determined. It discusses how balance of payments accounts record international transactions, the components of the current and capital accounts, how supply and demand determines exchange rates under flexible regimes, and how purchasing power parity and interest rate differentials can cause fluctuations in exchange rates from long-run equilibrium levels.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    11 views5 pages

    LIPSEY - CHRYSTAL - SUMM28Visit Us at Management - Umakant.info

    Uploaded by

    welcome2jungle
    The document summarizes key aspects of international trade, balance of payments accounts, foreign exchange markets, and how exchange rates are determined. It discusses how balance of payments accounts record international transactions, the components of the current and capital accounts, how supply and demand determines exchange rates under flexible regimes, and how purchasing power parity and interest rate differentials can cause fluctuations in exchange rates from long-run equilibrium levels.

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    of 5

    CHAPTER 28:

    The Balance of Payments and Exchange


    Rates

    SUMMARY
    CHAPTER 28: THE BALANCE OF
    PAYMENTS AND EXCHANGE RATES

    • International trade normally requires the exchange of the currency of


    one country for that of another. The major exception is trade within the
    euro zone. The exchange rate between two currencies is the amount of
    one currency that must be paid in order to obtain one unit of another
    currency.
    The Balance of Payments
    • Actual transactions among the firms, consumers, and governments of
    various countries are recorded in the balance of payments accounts. In
    these accounts any transaction that uses foreign exchange is recorded
    as a debit item, and any transaction that produces foreign exchange is
    recorded as a credit item. If all transactions are recorded, the sum of all
    credit items necessarily equals the sum of all debit items, because the
    foreign exchange that is bought must also have been sold.
    CHAPTER 28: THE BALANCE OF
    PAYMENTS AND EXCHANGE RATES
    • The two major categories in the balance of payments accounts are the
    current account and the capital account and financial accounts. When
    we talk about the balance of payments surplus or deficit, we are
    normally referring to the current account balance alone. A balance on
    the current account must be matched by a balance on the capital and
    financial accounts of equal magnitude but opposite sign.
    The Market for Foreign Exchange
    • The demand for pounds arises from UK exports of goods and services,
    income payments from overseas, capital inflows, and the desire of
    foreign governments to sue sterling assets as part of their reserves.
    • The supply of pounds to purchase foreign currencies arises from UK
    imports of goods and services, income payments to overseas, capital
    outflows, and the desire of holders of sterling assets to decrease the
    size of their holdings.
    CHAPTER 28: THE BALANCE OF
    PAYMENTS AND EXCHANGE RATES

    • The demand curve for pounds is negatively sloped and the supply
    curve of pounds is positively sloped when the quantities demanded
    and supplied are plotted against the price of pounds, measured in
    terms of a foreign currency.
    The Determination of Exchange Rates
    • When the authorities do not intervene in the foreign exchange
    market, there is a flexible exchange rate. Under fixed exchange rates
    the authorities intervene in the foreign exchange market to maintain
    the exchange rate within a specified range. To do this, they must hold
    sufficient stocks of foreign exchange reserves.
    • Under a flexible [or floating] exchange rate regime the exchange rate
    is market-determined by supply and demand for the currency.
    CHAPTER 28: THE BALANCE OF
    PAYMENTS AND EXCHANGE RATES

    • Fluctuations in exchange rates can be understood as fluctuations


    around a trend value that is determined by the purchasing power
    parity [PPP] rate. The PPP rate adjusts in response to differences in
    national inflation rates. Deviations from the PPP rate are related,
    among other things, to international differences in interest rates.
    • Exchange rates tend to overshoot their long-run equilibrium in
    response to shocks. A relaxation of monetary policy which lowers
    domestic interest rates will cause the exchange rate to depreciate.
    However, it will tend to depreciate to a point from which it can then
    appreciate at a rate sufficient to compensate for the interest rate fall.
    A rise in domestic interest rates will tend to make the exchange rate
    to overshoot in the opposite direction [upwards].

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