AP MACRO Last Unit

Examples of capital (financial account):

- A Korean company buys a factory in Ohio - An American buys a Japanese government bond - Foreign Direct Investments

U.S. income increases relative to other countries. Does the balance of payments move towards a deficit or a surplus?

- U.S. Citizens have more disposable income. - Americans import more. - Net exports (Xn) decrease. - The current account balance decreases and moves towards a deficit.

If the U.S. dollar depreciates relative to other countries, does the balance of payments

- U.S. exports become more desirable. - America exports more. - Net exports (Xn) increase. - The current account balance increases and moves towards a surplus.

Current or capital account + credit or debit?

1. Bill, an American, invests $20 M in a ski resort in Canada. Debit, capital 2. A Korean company sells jets to the U.S. Debit, current 3. A U.S. company sells planes to France. Credit, current 4. A Chinese company buys a mall in San Diego. Credit, capital 5. An illegal immigrant living in the U.S. sends a portion of his money to his family living in Bora Bora. Debit, current 6. A German investor buys $50,000 U.S. Treasury bonds. Credit, capital

What are the shifters of FOREX?

1. Changes in taste Ex: British tourists flock to the U.S. Demand for dollar increases, supply for pound increases. Dollar appreciates, pound depreciates. 2. Changes in relative incomes (resulting in more imports). Ex: U.S. growth increases U.S. incomes. U.S. buys more imports, U.S. demand for pounds increases, supply for dollar increases, pound appreciates, dollar depreciates. 3. Changes in relative price level (resulting in more imports). 4. Changes in relative interest rates.

The current account is made up of 3 parts:

1. Trades in goods and services (net exports) Ex: Toys imported from China, US cars exported to Mexico. 2. Investment income - income from the factors of production, including payments made to foreign investors. Ex: Money earned by Japanese car producers in the US. 3. Net transfers - money flows from private or public sectors. ex: donations, aids and grants, official assistance, remittance. * remittance = a sum of money sent, especially by mail, in payment for goods or services or as a gift.

In the FOREX market, we only look at _ countries/currencies at a time.

2.

What is balance of payments?

A summary of international transactions between countries during a given year (difference b/w the amount of money that comes into a country and the amount that goes out of it).

Balance of payments accounts record all of a country's international transactions during a year. a) Two major subaccounts in the balance of payments accounts are the current account and the capital account. In which subaccount will each of the following transactions be recorded? i) A U.S. resident buys chocolate from Belgium. ii) A U.S. manufacturer buys computer equipment from Japan. B) How would an increase in real income in the U.S. affect the current account balance? Explain.

Ai) current Aii) current B) U.S. Citizens have more disposable income. Americans import more. Net exports (Xn) decrease. The current account balance decreases and moves towards a deficit.

If the exchange rate goes up for a currency (visualize dotted lines), the currency _. If the exchange rate goes down for a currency, the currency _.

Appreciates, depreciates.

Buying a company, factory, mall, etc, is a part of the _ capital. The money earned from these things is part of the _ account.

Capital, current.

Domestic currency = _ Foreign currency = _

Credit. Debit.

What does the FOREX graph look like?

Demand (D) downwards, supply (S) upwards. The Y-axis is labeled with 2 symbols for currencies, one on top of the other like a fraction. The one on the bottom determines from which currency/ perspective we are interpreting the graph from. On the Y-axis, at the intersection of S and D there is a dotted line jutting out from the y-axis, labeled 'er'for exchange rate. On the x-axis, it says 'Quantity of _' , where _ is the currency on the bottom fraction for the Y-axis label.

FOREX

Foreign exchange.

FOREX Supply and Demand Simplified

Imagine a huge table with all the different currencies from every country. That's the foreign exchange market. Just like at a product market, you can't take things without paying. If you demand one currency, you must supply your currency. Ex: If Canadians want Russian Rubies, the demand for rubies in the FOREX market will increase and the supply of Canadian dollars will increase.

What is a foreign direct investment?

Investment made by a foreign company in the economy of another country. When a foreign company buys business in a different country.

What is depreciation?

Loss of value of a country's currency with respect to a foreign currency. For the U.S., it would mean that more units of a dollar are needed to buy a single unit of the other currency.

What is a credit and how is it marked on the accounts?

Money coming into the country from selling domestic goods or assets. +

What is a debit and how is it marked on the accounts?

Money leaving the country because you buy foreign goods or assets. -

When the dollar depreciates, it is said to be

Stronger.

If a country has a deficit in the current account, they must have a _ in the capital account.

Surplus.

What happens if you need fewer dollars to buy 1 pound (the price for a pound decreases)?

The U.S. dollar appreciates relative to the pound.

What happens if you need more dollars to buy one pound (the price for a pound increases)?

The U.S. dollar depreciates relative to the pound.

What is the capital (financial) account?

The account that measures the purchase and sale of financial assets abroad THAT STAY IN THAT COUNTRY!!!!! Can include financial capital such as real estate (house, factory, mall), stocks, bonds, and government securities.

Pound sterling

The currency of the UK.

The BOP is made up of what 2 accounts?

The current account and the capital (financial) account.

What happens if Europeans prefer vacationing in the U.S.?

The demand for dollars goes up and the supply for Euros goes up. The dollar appreciates and the Euro depreciates.

What is balance of trade (+ eq)?

The difference in value between a country's imports and exports. Net Exports (Xn) = Exports - Imports

What is appreciation?

The increase of value of a country's currency with respect to a foreign currency. For the U.S., it would mean that less units of a dollar are needed to buy a single unit of the other currency.

We examine one currency in terms of _

The other currency. Ex: $2 = £1.

What is net capital outflow?

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

What is the relationship between current and capital account?

They should zero each other out. If one is negative (deficit), then the other should be positive (surplus). Ex: The constant net inflow of foreign financial capital to the United States (capital account surplus) is what allows us to import more than we export (current account deficit).

What kinda of things go in the capital account?

Things that stay in the current country. Can include financial capital such as real estate (house, factory, mall), stocks, bonds, and government securities.

When the dollar depreciates, it is said to be

Weaker.

You can tell whether the transaction is a credit or debit based on

What currency the transaction takes place in.

What is trade surplus?

When a country exports more than it imports.

What is trade deficit (aka trade gap)?

When a country imports more than it exports.

What is capital account surplus?

When inflow > outflow

What is capital account deficit?

When outflow > inflow

The exchange rate depends on _ _ _ _ _

Which currency you are converting. Ex: $1 = £.5 and £1 = $2.

T o F: For every country, the BOP is aacounted in their national currency.

Yes. For example, in China, the BOP is accounted in Yen.

Express that with a graph:

You need to graphs to represent the perspective for both currencies. Graph 1, DOLLARS: 1. Draw at equilibrium. S up D down. Y axis is euro/dollar. Dotted line on Y-axis, ER. X axis is 'Quantity of dollars'. Show new demand line, demand shift out. Draw arrow. Draw new dotted line for Y-axis, label it er1.