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Chapter 18' Open Economy Macro: Exchange Rate and Trade Policy

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Chapter 18. Open Economy Macro: Exchange Rate and Trade Policy. Is the U.S. more or less affected by open economy issues relative to other countries? ... – PowerPoint PPT presentation

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Title: Chapter 18' Open Economy Macro: Exchange Rate and Trade Policy


1
Chapter 18. Open Economy Macro Exchange Rate and
Trade Policy
  • Is the U.S. more or less affected by open economy
    issues relative to other countries?
  • 18.A. The Balance of Payments
  • 18.B. Exchange Rates
  • 18.C. Advantages and Disadvantages of
    Alternative Exchange Rate Systems
  • 18.D. Adjusting the Economy to the Exchange Rate
    via Trade Policy

2
18.A. The Balance of Payments
  • Does this capture information about residents or
    citizens of a country?
  • What must the balance of payments sum to?
  • Does this tell us about net or gross
    transactions?
  • 18.A.1. The Current Account
  • 18.A.2. The Capital Account
  • 18.A.3. The Official Transactions Account

3
18.A.1. The Current Account
  • Are goods and services or assets kept track of on
    this account?
  • What are the names of the balances for goods
    alone, and for the sum of goods and services?
  • Has this account generally been in surplus or
    deficit during your lifetime?

4
18.A.2. The Capital Account
  • Are goods and services or assets kept track of on
    this account?
  • Has this account generally been in surplus or
    deficit during your lifetime?
  • Which involves more gross transactions, the
    current or capital account?

5
18.A.3. The Official Transactions Account
  • What is kept track of on this account?
  • Who is doing the buying (or selling)?
  • What are they buying (or selling)?
  • What are they trying to do by buying (or selling)
    it?
  • Who potentially benefits from this?

6
18.B. Exchange Rates
  • Exchange rates are prices of what in terms of
    what? Does the reciprocal of that price mean the
    same thing?
  • 18.B.1. Exchange Rates and the Balance of
    Payments
  • 18.B.2. Fundamental Forces Determining Exchange
    Rates
  • 18.B.3. Why Exchange Rate Determination Is More
    Complicated than Supply/Demand Analysis Makes It
    Seem
  • 18.B.4. International Trade Problems from
    Shifting Values of Currencies
  • 18.B.5. How a Fixed Exchange Rate System Works

7
18.B.1. Exchange Rates and the Balance of
Payments
  • If the domestic countrys balance of payments is
    in deficit, are foreigners holding more or less
    of the domestic currency than they want to?
  • What sort of pressure does this put on the
    exchange rate?
  • Does this process work in reverse if there is a
    surplus?

8
18.B.2. Fundamental Forces Determining Exchange
Rates
  • Suppose that in the domestic country
  • Income falls. What happens to imports?
  • Prices fall. What happens to exports?
  • Interest rates rise. What happens to investment
    by foreigners in the domestic country?
  • What do these do to the amount that someone is
    willing to give up to get the domestic currency?
  • What will that do to the exchange rate?
  • Do all of these processes work in reverse?

9
18.B.3. Why Exchange Rate Determination Is More
Complicated than Supply/Demand Analysis Makes It
Seem
  • Exchange rates are hugely driven by what other
    factor?
  • Can that factor feed on itself to create a
    vicious cycle?

10
18.B.4. International Trade Problems from
Shifting Values of Currencies
  • Why do business managers care about exchange
    rates?
  • From their perspective, would they prefer stable
    or volatile exchange rates?

11
18.B.5. How a Fixed Exchange Rate System Works
  • Does the U.S. have this sort of system? Did it
    ever? Who has fixed exchange rates now?
  • What does a government agree to do when it says
    it will fix its exchange rates?
  • Is this a problem if they end up selling their
    own currency?
  • What about buying it? Can they run out of other
    valuable assets to buy their currency with?

12
18.C. Advantages and Disadvantages of
Alternative Exchange Rate Systems
  • 18.C.1. Fixed Exchange Rates
  • 18.C.2. Flexible Exchange Rates
  • 18.C.3. Partially Flexible Exchange Rates
  • 18.C.4. Which View is Right?
  • 18.C.5. The Euro A Common Currency for Europe

13
18.C.1. Fixed Exchange Rates
14
18.C.2. Flexible Exchange Rates
15
18.C.3. Partially Flexible Exchange Rates
16
18.C.4. Which View is Right?
17
18.C.5. The Euro A Common Currency for Europe
18
18.D. Case Study The Argentinean Currency Crisis
  • 18.D.1. Achieving the Three Goals
  • 18.D.2. An External Shock to the Economy
  • 18.D.3. Lessons from Argentinas Crisis

19
18.D.1. Achieving the Three Goals
20
18.D.2. An External Shock to the Economy
21
18.D.3. Lessons from Argentinas Crisis
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