International Trade Balance of Payments Accounts – payments both enter and exit the - PowerPoint Presentation

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International Trade Balance of Payments Accounts – payments both enter and exit the - PPT Presentation

Current Account no long term liabilities are created Balance of Payments on Goods and Services a Exports imports Factor Income Payments for the use of factors of production land labor capital entrepreneurial ability ID: 796611

demand dollars supply euros dollars demand euros supply quantity goods yen currency increases er1 dollar pesos payments account buy

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Slide1

International Trade

Slide2

Balance of Payments Accounts – payments both enter and exit the U.S.Current Account – no long term liabilities are created

Balance of Payments on Goods and Services

a. Exports – imports

Factor Income

Payments for the use of factors of production (land, labor, capital, entrepreneurial ability)

International Transfers

Money sent by immigrants to their families in other countries

Slide3

Balance of Payments AccountsCurrent Account – no long term liabilities are created

Financial Account – buying and selling of assets that create future liabilities

Current Account + Financial Account = 0

1. In the U.S. the current account is usually negative – we import more than we export 2. This puts dollars in foreign hands 3. Those $ used to buy assets in the U.S. – making financial account positive.

https://www.youtube.com/watch?v=W0YwGLz50TA

Slide4

Are the following activities part of the current account or the financial account?

Slide5

Harley-Davidson USA purchases $25 million in production machinery from a Japanese company.

Current account

Slide6

Mike Johnson, U.S. entrepreneur, invests $50 million to develop a theme park in Malaysia

Financial account

Slide7

A Chinese company sells $1 million worth of berets to the U.S. Army.

Current account

Slide8

Each month, Ima Grent, who recently arrive in the U.S., sends half her paycheck to her sister in Poland.

Current account

Slide9

A Brazilian investor buys five $10,000 U.S. Treasury bonds.

Financial account

Slide10

Review of Current Accounts.

https://www.youtube.com/watch?v=W0YwGLz50TA

Slide11

How much is the merchandise trade balance? $200 – 80 = $120

How much is the balance of payments on goods and services?

($200 + 50) – (80 + 20) = $150How much is the Net International factor income? 70 – 10 = 60

Payments from foreigners

Payments to foreigners

Sales of assets to foreigners

Purchase of assets from foreigners

Goods

$200

$80

Services

Factor Income

Transfer Payments

Official Sales and purchases

100

300

Private sales and purchases

Slide12

Payments from foreigners

Payments to foreigners

Sales of assets to foreigners

Purchase of assets from foreignersGoods$200$80-

Services

Factor Income

Transfer Payments

Official Sales and purchases

100

300

Private sales and purchases

How much are Net international transfer payments?

10 – 20 = -10

What is the balance of payments on current accounts?

(200 – 80) + (50 – 20) + (70 – 10) + (10 – 20) = 200

What is the balance of payments on financial accounts?

(100 – 300) + (80 – 80) = -200

Slide13

Foreign Exchange Market A. Goods and services produced in a country must be paid for in that country’s currency

B. Exchange rates

1. price set by supply and demand in the global economic market 2. the price of domestic currency is expressed in terms of another currency a. $1 domestic currency = X foreign currency

Slide14

May

August

May

AugustMexican Peso0.11010.15029.0836.6558

British Pound

1.4

1.8

0.71

0.56

Canadian Dollar

0.64

0.63

1.5625

1.5873

European Euro

0.87

0.91

1.149

1.099

Swedish Krona

0.094

0.093

10.638

10.753

Japanese Yen

0.0083

0.0090

120.482

111.111

Cost of foreign currency in U.S. dollars1 foreign currency = $X

Cost of U.S. dollar in foreign currency

1 dollar = X foreign currency

May

August

Dinner costs 500 Mexican Pesos

Hotel room costs 30,000 Yen

BMW costs 85,000 euros in GermanySwedish meatballs cost 30 kronorPants cost 72 pounds in LondonJacket costs 1,800 Canadian dollars

$55.05

$75.10

$249.00

$270.00

$73,977.37

$77,343.04

$2.82

$2.79

$101.41

$128.57

$1152.00

$1134.00

Slide15

C. Graph 1. X axis – dollars demanded at a given rate 2. y axis – exchange

rate

3. The supply of U.S. dollars is determined by U.S.

demand for foreign goods, services, and investments. 4. The demand for U.S. dollars is determined by foreign demand for U.S. goods, services, and investments.

Euros_

Dollars

Other currency

Currency you are analyzing

Slide16

D. Appreciate 1. a country’s currency is more valuable in terms of other currencies 2. Demand for the currency goes up

3. Supply of the currency goes down

4. an increase in the exchange rate 5. When a dollar appreciates you get more foreign currency for your $ 6. exports decrease, imports increase

Slide17

E. Depreciate 1. a country’s currency is LESS valuable in terms of other currencies

2. Demand

for the currency goes

down 3. Supply of the currency goes up 4. a decrease in the exchange rate 5. When a dollar depreciates you get less foreign currency for your $ 6. exports increase, imports decrease

Slide18

May

August

Dinner costs 500 Mexican Pesos

$55.05$75.10Hotel room costs 30,000 Yen$249.00$270.00BMW costs 85,000 euros in Germany

$73,977.37

$77,343.04

Swedish meatballs cost 30 kronor

$2.82

$2.79

Pants cost 72 pounds in London

$101.41

$128.57

Jacket

costs 1,800 Canadian dollars

$1152.00

$1134.00

Did the dollar appreciate or depreciate?

depreciated

appreciated

depreciated

appreciated

Slide19

Quantity U.S. Dollars

Euros_

Dollars

Usually when working exchange problems you will have two supply/demand graphs side by side.

Quantity Euros

Dollars

Euros

Demand and supply for U.S. dollars

Demand and supply for Euros

Currency you are analyzing goes here

Slide20

Economic Conditions and policies affect exchange rates and shift the curves 1. Interest Rates a. High interest rates attract foreign investors

b. Increase demand for domestic currency

2. Income

a. as income increases so does consumption of both foreign and domestic goods b. Increase demand for currency 3. Price Level a. A country that experiences inflation will also have a depreciated currency b. They will export fewer goods- lower demand for their currency 4. Tastehttps://www.youtube.com/watch?v=D41EuDh3epI

Slide21

Quantity U.S. Dollars

Euros_

Dollars

The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.

Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases

Quantity Euros

Dollars

Euros

Demand and supply for U.S. dollars

Demand and supply for Euros

Slide22

Quantity U.S. Dollars

Euros_

Dollars

The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.

Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases

Quantity Euros

Dollars

Euros

er1

To buy euros, the Americans will supply U.S. dollars

Demand and supply for U.S. dollars

Demand and supply for Euros

Slide23

Quantity U.S. Dollars

Euros_

Dollars

The price of U.S. goods rise relative to the prices of German goods – U.S. goods become more expensive while German goods become cheaper.

Americans will demand the less expensive German goods. To buy German goods, they need euros, the demand for euros increases

To buy euros, the Americans will supply U.S. dollars

Quantity Euros

Dollars

Euros

er1

Demand and supply for U.S. dollars

Demand and supply for Euros

Slide24

Quantity U.S. Dollars

Euros_

Dollars

Quantity Euros

Dollars

Euros

er1

U.S. Dollar depreciates

Euro appreciates

The exchange rate decrease; that is, the number of euros it takes to buy a U.S. dollar decreases

The exchange rate increases, that is, the number of U.S. dollars to takes to buy a euro increases

Slide25

Quantity Mexican Pesos

Euros_

Peso

French Tourists flock to Mexico’s beaches

Quantity Euros

Pesos_

Euros

Demand and supply for Pesos

Demand and supply for Euros

French demand Pesos to pay for their Mexican vacations. French supply Euros to buy the Pesos they need.

Slide26

Quantity Mexican Pesos

Euros_

Peso

French Tourists flock to Mexico’s beaches

Quantity Euros

Pesos_

Euros

Demand and supply for Pesos

Demand and supply for Euros

er1

Appreciate or Depreciate

French demand Pesos to pay for their Mexican vacations. French supply Euros to buy the Pesos they need.

Slide27

Quantity Mexican Pesos

Euros_

Peso

French Tourists flock to Mexico’s beaches

Quantity Euros

Pesos_

Euros

Demand and supply for Pesos

Demand and supply for Euros

er1

Appreciate

Depreciate

Slide28

Quantity

Dollars

yen__

dollars

U.S. Children Want Videos Produced in Japan

Quantity Yen

dollars

yen

Demand and supply for U.S. Dollars

Demand and supply for Yen

Americans demand Yen to pay for their videos. Americans supply dollars to buy their Yen.

Slide29

Demand and supply for U.S. Dollars

Demand and supply for Yen

er1

Appreciate or Depreciate

U.S. Children Want Videos Produced in Japan

Quantity

Dollars

yen__

dollars

Quantity Yen

dollars

yen

Slide30

Demand and supply for U.S. Dollars

Demand and supply for Yen

er1

Depreciate

Appreciate

U.S. Children Want Videos Produced in Japan

Quantity

Dollars

yen__

dollars

Quantity Yen

dollars

yen

Americans demand Yen to pay for their videos. Americans supply dollars to buy their Yen.

Slide31

Demand and supply for U.S. Dollars

Demand and supply for Yen

Japan’s Real GDP Increases

Quantity

Dollars

yen__

dollars

Quantity Yen

dollars

yen

As income in Japan increases, the Japanese purchase more domestic and U.S. goods. Demand for U.S. goods increases, the demand for the U.S. dollar increases, and the number of Japanese yen it takes to purchase a U.S. dollar increases.

Slide32

Demand and supply for U.S. Dollars

Demand and supply for Yen

er1

Depreciate

Appreciate

Japan’s Real GDP Increases

Quantity

Dollars

yen__

dollars

Quantity Yen

dollars

yen

Slide33

Demand and supply for U.S. Dollars

Demand and supply for British Pound

Real Interest Rates in the U.S. increase Relative to Great Britain

Quantity

Dollars

Pound

dollars

Quantity Pound

dollars

Pound

The increase in U.S. real interest rates makes investing in the U.S. more attractive to investors in Great Britain. Thus, the demand for the U.S. dollar increases. The supply of the pound increases

Slide34

Demand and supply for U.S. Dollars

Demand and supply for British Pound

er1

Depreciate

Appreciate

Quantity

Dollars

Pound

dollars

Quantity Pound

dollars

Pound

Real Interest Rates in the U.S. increase Relative to Great Britain

The increase in U.S. real interest rates makes investing in the U.S. more attractive to investors in Great Britain. Thus, the demand for the U.S. dollar increases. The supply of the pound increases

Slide35

Demand and supply for U.S. Dollars

Demand and supply for Euros

Europe Experiences a Recession

Quantity

Dollars

Euros

dollars

Quantity Euros

dollars

Pound

Demand for U.S. goods decreases and the U.S. dollar decreases as income falls across Europe

Slide36

Demand and supply for U.S. Dollars

Demand and supply for Euros

er1

Depreciate

Appreciate

Quantity

Dollars

Euros_

dollars

Quantity Euros

dollars

Euro

Europe Experiences a Recession

Demand for U.S. goods decreases and the U.S. dollar decreases as income falls across Europe

Slide37

Demand and supply for U.S. Dollars

Demand and supply for Canadian $

The Price Level in Canada Increases Relative to the United States

Quantity

Dollars

Canadian $

dollars

Quantity Canadian $

__dollars__

Canadian $

Canadians would want to buy more U.S. goods and thus demand more dollars. That means that Canadians would want to supply more Canadian dollars to do so

Slide38

Demand and supply for U.S. Dollars

Demand and supply for Canadian $

er1

Depreciate

Appreciate

Quantity

Dollars

anadian $_

dollars

Quantity Canadian $

_dollars__

Canadian $

The Price Level in Canada Increases Relative to the United States

Canadians would want to buy more U.S. goods and thus demand more dollars. That means that Canadians would want to supply more Canadian dollars to do so

Slide39

https://www.youtube.com/watch?v=9DVYVfI81R8

Final Review