Balance of trade & exr

Question 1

define balance of payments (BOP)

Answer 1

Refers to a record of the receipts from and payments for all of the economic transactions btwn residents of an ecy and the rest of the world.

Question 2

what are surpluses & deficits of the current account of a cty’s BOP?

Answer 2

a surplus in the CA of a cty’s BOP occurs when the total value of receipts exceeds the total value of payments arising from transactions in the account, resulting in net inflow of money.

a deficit in the CA of a cty’s BOP occurs when the total value of payments exceeds the total value of recipts arising from transactions in the account, resulting in net outflow of money.

BOT is a part of CA btw

Question 3

Capital & financial account

Answer 3

records the flow btwn ctys arising frm:

• short-term capital flows (hot $ flows)
• long-term capital flows

Question 4

what is balance of trade (BOT)?

Answer 4

Refers to the record of the receipts frm the export of g&s and payments for the import of g&s btwn residents of an ecy and the rest of the world

Question 5

causes of BOT deficit

Answer 5

px factors:

• relative inflation rates (dom inflation rates higher)
• exchange rates (appreciation of dom currency): NOTE assuming dd for both X & M to be sufficiently px elastic (PED of X = 1 & PED of M = 1), the px changes in X & M will induce a large enough change in Qd in the opposite direction to cause total X rev to fall relative to total M…etc)
• changes in px of key M/X arising frm global dd&ss conditions
• emergence of low-cost competitors

non-px factors:

• relative growth rates of TP (TP have poor growth rates)
• T&Ps

Question 6

consequences of BOT deficit

Answer 6

on other macro goals: BOT deficit has contractionary effect on the ecy
- REG falls
- unN incr
» however, shld the ecy be overheating, the decline in AD reduces comp for FOPs -> relieves inflationary pressure
» how severe the trade deficit and its consequent effect on AD poses a prob to the ecy depends on the relative share of the various AD components

consider SOL

indirect effect on other macro goals

• problem of deficit financing
• prolonged net outflow of cty’s currency -> undermining exr stability

Question 7

consequences of BOT surplus

Answer 7

on other macro goals: BOT surplus has expansionary effect on the ecy
- REG rises
- unN decr
» however, shld the ecy be overheating, the rise in AD may cause dd-pull inflation
» how severe the trade deficit and its consequent effect on AD poses a prob to the ecy depends on the relative share of the various AD components

SOL: w an excess value of X over M, reduces availability of g&s to cty’s residents, fewer wants and needs satisfied and lower lvl of utility derived -> current mat SOL falls

indirect effect on other macro goals
- net currency inflow -> dom currency apprec -> moderates dd-pull inflation in X PLUS moderates c-p inflation -> RNY shld rise while GPL rises modestly

Question 8

types of exchange rate systems

Answer 8

free float:
where the exr is determined by mkt forces of dd&ss of the cty’s currency in the forex mkt w/o any form of gov intervention

fixed exr system: e.g. HKD is pegged to USD
where a currency’s exr does not move freely but is based on a pre-determined rate agnst a specific foreign currency of basket of currencies set by the gov

managed float: e.g. SGD
where the monetary authority allows the currency to float but still intervenes in the mkt to ensure the exr does not move beyond the undeclared official limits

*REVISE THE FOREX MKT CURRENCY DD&SS GRAPH!!!!!