Unit 7

4/21
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 

Current Account

• 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

Capital Account

• 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

Official Reserves

• 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

4/23
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

1.  Change in buyers taste
2. Change in relative income
3. Change in relative prices
4. Change in interest rates
5. Change in expectations

-Fixed rate Exchange

• Determined by the government 

- Flexible/floating exchange rate

• Determined by market forces such as supply/demand, little or no government intervention

4/24

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