Econ 504 Week 1, Lecture 2
Econ 504 Week 1, Lecture 2 ECON 504
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This 2 page Class Notes was uploaded by Cassie Frow on Monday January 18, 2016. The Class Notes belongs to ECON 504 at University of South Carolina taught by Dr. Breuer in Winter 2016. Since its upload, it has received 33 views. For similar materials see International Monetary Economics in Economcs at University of South Carolina.
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Date Created: 01/18/16
Lecture 2 International Transactions and currency exchange Balance of Payments account terminology BOP and the currency market Sub-accounts in the BOP Terms Sales of goods and service to foreign countries: exports (EX) Sales of assets to foreign countries: capital inﬂows (Kin) Purchases of goods and services from foreign countries: imports (IM) Purchases of assets from foreign countries: capital outﬂow (Kout) International Transactions and currency exchange Domestic-country sales of goods, services, and assets abroad create a demand for domestic currency and a supply of foreign currency on international markets EX + Kin —> SFC (or DDC) Domestic-country purchases of goods, services, and assets from abroad create a demand for foreign currency and a supply of domestic currency on international markets IM + Kout —> DFC (or SDC) BOP and the currency market BOP = sum of sales by domestic country to foreign countries - sum of purchases from foreign countries by domestic country Sales to foreign countries = foreigners’ purchases from us BOP = (EX + Kin) - (IM + Kout) Suppose you have data on Mexico’s international transactions. Assume MP/$ is MP 10/$1 EX = MP 500b IM = MP 300b Kin = MP 450b Kout= MP 750b Mexico’s BOP = MP -100b DMP = 500 + 450 = MP 950b S$ = 950/(10/$1) = $95b Mexico has a BOP deﬁcit In the market for Mexican pesos, there will be an excess supply of Mexican pesos on the international currency market of 100b In the market for USD, there will be an excess demand of USD on the international currency market of If country A has a surplus on its BOP, it means A’s sales to foreign countries exceed A’s purchases from foreign countries BOPA > 0 (EXA + KinA) > (IMA + KoutA) In a currency market, DA > SA SFC > DFC FC is a foreign or non-A currency If a country has a deﬁcit on its BOP, it means A’s sales are less than purchases from foreign countries BOPA < (EXA + KinA) < (IMA + KoutA) *excess supply of currency A and excess demand for foreign currency BOP Alternative Equation BOP = (EX + Kin) - (IM + Kout) BOP = (EX - IM) + (Kin - Kout) BOP = CA + KA CA: current account KA: capital account Whether the BOP is in surplus or deﬁcit depends on the sum of these 2 accounts CA: (EX - IM) + net income earned + net unilateral transfers CA = EX - IM KA: (Kin - Kout) Surpluses: If CA > 0, then EX > IM and DDC > SDC and SFC > DFC If KA > 0, then Kin > Kout, DDC > SDC, and SFC > DFC Deﬁcits: If CA < 0, then IM > EX, DDC < SDC, SFC < DFC If KA < 0, then Kin < Kout, DDC < SDC, SFC < DFC
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