unit 5
U.S. income increase relative to other countries. Does the balance of trade move toward 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 toward a deficit.
If the U.S. dollar depreciates relative to other countries does the balance of trade move toward a deficit or a surplus?
-US exports are desirable-America exports more-Net exports (Xn) increase-The current account balance decreases and moves toward a surplus.
current account in BOP
1.Trades in Goods and Services (Net Exports)-Difference between a nation's exports of goods and services and its imports of goods and servicesEx: 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 the private or public sectorsEx: donations, aids and grants, official assistance
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -A Chinese company buys a shopping mall in San Diego
Capital Account (financial asset), Credit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -A German investor buys $50,000 US Treasury Bonds
Capital Account (financial asset), Credit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -Bill, an American, invests $20 million in a ski resort in Canada
Capital Account (financial asset), Debit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -An illegal immigrant sends a portion of his earning to his family
Current Account (net transfer), Debit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -Italian tourists spend 5 million in the US while American tourists spend 8 million in Italy.
Current Account (net transfer), Debit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -A US company, Boeing, sells twenty 747s to France
Current Account (trade of goods/services), Credit
Identify if the examples are counted in the current or capital account and determine if it is a credit or debit for the US. -A Korean company sells vests to the US Military
Current Account (trade of goods/services), Debit
Changes in Relative Incomes (Resulting in more imports)
Ex: US growth increase US incomes....U.S. buys more imports...U.S. Demand for pounds increasesSupply of U.S. dollars increasesPound- appreciatesDollar- depreciates
Changes in Relative Price Level (Resulting in more imports)
Ex: US prices increase relative to Britain....U.S. demand for cheaper imports increases... U.S. demand for pounds increasesSupply of U.S. dollars increasesPound- appreciatesDollar- depreciates
What happens if you need less dollars to buy one pound (the price for a pound decreases)? Ex: From $2=£1 to $1=£4
The U.S. Dollar APPRECIATES relative to the Pound
what is appreciation of currency
The increase of value of a country's currency with respect to a foreign currency
what is depreciation of currency
The loss of value of a country's currency with respect to a foreign currency
The US suffers a larger recession
USD appreciates (Supply Falls) and Yen depreciates (Demand Falls)
Inflation in Japan rises significantly faster than in the US
USD appreciates and Yen depreciates
Japan places high tariffs on all US imports
USD depreciates (Demand Falls) and Yen appreciates (Supply Falls)
American tourists increase visits to Japan.
USD depreciates and Yen appreciates
Japan has a large budget deficit that increases Japanese interest rates
USD depreciates and Yen appreciates
The US government significantly decreases personal income tax
USD depreciates and Yen appreciates
what is BOP
balance of payments considers ALL international transactions.
Changes in Tastes
ex: British tourists flock to the U.S...Demand for U.S. dollars increases (shifts right)Supply of British pounds increases (shifts right)Pound-depreciates Dollar-appreciates
Changes in relative Interest Rates
ex: US has a higher interest rate than Britain.British people want to put money in US banksCapital Flow increase towards the USBritish demand for U.S. dollars increases... British supply more pounds Pound-depreciatesDollar- appreciates
what is the capital account?
measures the purchase and sale of financial assets abroad. Purchases of things that stay in the foreign country. Examples: -US company buys a hotel in Russia -A Korean company buys shares of Microsoft -Australian company buys local Mall
What happens if you need more dollar to buy one pound (the price for a pound increases)?
the US dollar depreciates relative to the pound