unit 5

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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


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