PRINCIPLES OF MACROECONOMICS PART V The World Economy TENTH EDITION CASE FAIR OSTER © 2012 Pearson Education, Inc Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly ofTefft 58 PART V The World Economy © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 Open-Economy Macroeconomics: The Balance of Payments and Exchange Rates 20 CHAPTER OUTLINE The Balance of Payments The Current Account The Capital Account The United States as a Debtor Nation Equilibrium Output (Income) in an Open Economy The International Sector and Planned Aggregate Expenditure Imports and Exports and the Trade Feedback Effect Import and Export Prices and the Price Feedback Effect PART V The World Economy The Open Economy with Flexible Exchange Rates © 2012 Pearson Education, Inc Publishing as Prentice Hall The Market for Foreign Exchange Factors That Affect Exchange Rates The Effects of Exchange Rates on the Economy An Interdependent World Economy Appendix: World Monetary Systems Since 1900 of 58 When people in countries with different currencies buy from and sell to each other, an exchange of currencies must also take place PART V The World Economy exchange rate The price of one country’s currency in terms of another country’s currency; the ratio at which two currencies are traded for each other Within a certain range of exchange rates, trade flows in both directions, is mutually beneficial, and each country specializes in producing the goods in which it enjoys a comparative advantage In 1971, most countries, including the United States, began allowing exchange rates to be determined essentially by supply and demand © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 PART V The World Economy The study of exchange rates is very important because: a Exchange rates determine the course of monetary policy b Exchange rates strongly influence interest rates c Exchange rates are a factor in determining the flow of international trade d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 PART V The World Economy The study of exchange rates is very important because: a Exchange rates determine the course of monetary policy b Exchange rates strongly influence interest rates c Exchange rates are a factor in determining the flow of international trade d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 The Balance of Payments PART V The World Economy foreign exchange All currencies other than the domestic currency of a given country balance of payments The record of a country’s transactions in goods, services, and assets with the rest of the world; also the record of a country’s sources (supply) and uses (demand) of foreign exchange © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 PART V The World Economy Colombian purchases of real estate in Miami: a Increase the U.S supply of foreign exchange b Increase the U.S demand for foreign exchange c Decrease the U.S supply of foreign exchange d Decrease the U.S demand for foreign exchange © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 PART V The World Economy Colombian purchases of real estate in Miami: a Increase the U.S supply of foreign exchange b Increase the U.S demand for foreign exchange c Decrease the U.S supply of foreign exchange d Decrease the U.S demand for foreign exchange © 2012 Pearson Education, Inc Publishing as Prentice Hall of 58 The Balance of Payments The Current Account balance of trade A country’s exports of goods and services minus its imports of goods and services trade deficit Occurs when a country’s exports of goods and services are less than its imports of goods and services balance on current account Net exports of goods plus net exports of services plus net investment income plus net transfer payments PART V The World Economy The Capital Account balance on capital account In the United States, the sum of the following (measured in a given period): the change in private U.S assets abroad, the change in foreign private assets in the United States, the change in U.S government assets abroad, and the change in foreign government assets in the United States © 2012 Pearson Education, Inc Publishing as Prentice Hall 10 of 58 ... the domestic currency of a given country balance of payments The record of a country’s transactions in goods, services, and assets with the rest of the world; also the record of a country’s sources... Inc Publishing as Prentice Hall of 58 The Balance of Payments The Current Account balance of trade A country’s exports of goods and services minus its imports of goods and services trade deficit... Goods exports Goods imports (1) Net export of goods Billions of dollars 1,045.5 –1,562.6 –517.1 Exports of services Imports of services (2) Net export of services 509.2 –370.8 138.4 Income received