Balance of Payments
- Sum of all transactions between nation's residents and residents of all foreign countries.
- Statement shows all payments a nation receives from foreign countries and all the payments it makes to them.
- Example : Exports and imports of goods and services
- Example: Interest and dividend received or paid abroad
- Record of all the imports and exports
- Record of services refers to tourism, transportaion, engineering, etc.
- Balance of Trade- combo of imports and exports of goods/services
- B.O.T Deficit - imports > exports
- B.O.T Surplus - imports < expoorts
- Purchases of real or financial assets and the correspondin flow of monetary payments that accompany them.
- Example : Foreign firm buys an office building or U.S govenment security. Those would be exports in return for payments of foreign currency
- Central banks of nations hold quantities of foreign currency called Official Reserves
- These Reserves can be drawn upon to make up any net deficit between capitol and current goods
- All three accounts must equal zero
- However there can be an ambiance between capital and current goods. Deficits are drawing down of foreign currency. Surplus is the building up in Foreign Currency
Foreign Exchange Market
- Supply of the dollar comes from US citizens, banks, and industries wanting to purchase foreign goods, investments, assets, and to make transfer payments to foreigners
- Demand of the dollar comes from foreigners, banks, and industries wanting to purchase our goods, investments, assets, and to make transfer payments to the US
*Dollar appreciates
- Demand increases, supply decreases
* Dollar depreciates
-Demand decreases, suply increases
-Five determinants of supply and demand in the foreign exchange market
- Change in buyers taste
- Change in relative income
- Change in relative prices
- Change in interest rates
- Change in expectations
- Determined by the government
- Determined by market forces such as supply/demand, little or no government intervention
Absolute/ Comparative advantage
-Absolute Advantage : the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
-Comparative Advantage: A country makes goods at low opportunity cost, both countries benefit from trade.
- Terms of Trade: Ratio of exports to import prices
- based on comparative advantage
- Specialization allows world output to grow and increase nation's productivity.
- Produces larger inputs of goods and services
