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International Trade and Exchange Rates

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International Trade and Exchange Rates. Outline. Balance of payments (BOP) accounting ... Exchange rates how are they determined? Exchange rates and the price ... – PowerPoint PPT presentation

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Title: International Trade and Exchange Rates


1
International Trade and Exchange Rates
  • Outline
  • Balance of payments (BOP) accounting
  • How open is the U.S. economy?
  • Description of international trade
  • Exchange rateshow are they determined?
  • Exchange rates and the price of imported and
    exported goods.

2
Balance of payments accounting
  • BOP accounting is the recording of transactions
    between domestic and foreign economic agents.
  • Any transaction that results in a receipt of
    money by domestic agents from abroad is recorded
    as a credit in the BOP accounts.
  • Any transaction that entails the payment of money
    by domestic units to foreigners is recorded as a
    debit in the BOP accounts.
  • The current account records foreign transactions
    involving merchandise and services.
  • The capital account records foreign transactions
    involving financial assets and land.

3
Current Account (in billions)
Source Department of Commerce
4
Capital Account (in billions)
Source Department of Commerce
5
An index of openness
This is a simple measure of the relative
importance of the foreign sector
  • Let
  • O denote the index of openness
  • X is exports
  • M is imports
  • GDP is gross domestic product

Thus, we have
6
Imports Exports as a Percent of U.S. GDP,
1969-2000
percent
7
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8
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9
The U.S. trade deficitballooned to
271.31billion in 1999a 107billion increase
from 1998.

10
In billions of current dollars
11
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12
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13
Current Account balance of selected
industrialized nations, August 1998 to August 1999
Source The Economist
14
Top Exporters in 1999
Source The Economist
15
An exchange rate is the price of one national cur
rency expressed in terms of another national cu
rrency. For example, the dollar
price of the British pound is 1.71--
meaning it takes 1.71 to buy 1 pound
16
  • Why do agents want to swap marks for dollars?
  • To buy American-made goods.
  • To hold stocks in U.S. companies or other
    dollar-denominated assets.
  • To speculate on future exchange rate movements

Exchange rates are determined by the supply and
demand of
foreign exchange
S
DM per
1.82
1.69
In this case, the mark depreciates against the
dollar
D
D
s
0
17
Source Wall Street Journal
Currency Cross Rates New York Trading, August1,
2000
18
Euro in free fall
10/11/99
2/28/00
7/17/00
Dollars per Euro
19
Firms and individuals demand marks to buy German
- made goods, to hold mark-denominated financial
assets, or to profit from what they hope will be
an increase in the international value of the ma
rk.
?Dollar appreciates against the mark
S
per DM
S
.59
.55
D
DMs
20
Let the dollar price of the mark 0.59--i.e.,
it costs 59 cents to purchase 1 mark in the
market for foreign exchange. Let the mark price
of a Krups espresso maker 100 marks
Question What is the dollar price of the Krups
espresso maker?
price (.59)(100) 59.00
21
Effect of an appreciating dollar on the price of
imported goods
What if the dollar should appreciate, or gain
value, against the mark? Let the dollar price o
f the mark decrease to 0.55 .
Question What is the dollar price of the Krups
espresso maker?
price (.55)(100) 55.00
22
Exchange rates and the prices of exported goods
and services
Let the mark price of the dollar 1.69
marks--i.e., its cost 1.69 marks to buy a dollar
in the foreign exchange market.
Let the dollar price of the Microsoft Windows 98
189.00 Question What is the mark price of
Windows 98?
Mark price (1.69)(189.00) 319.41 marks
23
Effect of a depreciating mark on the price of
Windows 98
Let the mark price of the dollar increase to 1.82
marks. Question What is the mark price of
Windows 98?

Mark price (1.82)(189.00) 343.98 marks
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