Ch.10&11 X Rates & Balance of Pmts Flashcards
A theory that
X Rate changes to equate
Purchasing Power
of each currency
Purchasing Power Parity Theory
purchasing powers of diff. currencies will tend to become equal over time
5 Reasons why
Prices are not the same worldwide?
(Prevent from
Purchase Power Parity)
1) Srv NOT traded int’lly
(G/S NOT transportable)
2) Trans & Insurance costs
3) Tariffs & Trade restrictions
4) Consumer Preferences
5) Financial Assets value of currencies of trade
Buying
@where for $
& Selling it
@where for $$$
is called ___
Arbitrage
Investment type that is
the Purchase of
Real Assets/Real Estate
Direct Investment
Investment type that is
the Purchase of
shares/bonds < 50% ownership
Portfolio Investment
5 DD for domestic currency
(supp for foreign currency)
1) Foreigners who buy exports or travel
2) Foreigners who invest
3) Receive income/gift/transfer from abroad
4) Speculator
5) Arbitrager
money in
5 Supp for domestic currency
(DD for foreign currency)
1) Buy Foreign Imports or Travel
2) Buy foreign investment
3) Foreigners who receive income/gift/transfer
4) Speculator
5) Arbitrager
money out
DD crv of a currency =?
Supp crv of a currency =?
Export = DD Crv
Import = Supp Crv
When currency depreciates,
the effective price of
EXPORTS __
& total exports __
↓
↑
When currency appreciates,
the effective price of
IMPORTS __
& total imports __
↓
↑
In Currency DD/Supp graph
X-Axis=?
Y-Axis=?
X = Qty of a currency
in World Money Market
Y = Price of a currency
in Foreign X value
When buying imported goods,
Supply of Domestic Currency __
↑
DD of currency
comes from ___
Supp of currency
comes from ___
Foreigners
Citizens
4 Determinants of
DD of a currency
1) Income Level of foreigners
2) Relative Prices of products
sold in domestic/foreign
excl oil
3) Foreigners’ Tastes
4) Comparative Interest Rates
$$ → higher interest rate
When Exports ↓
Currency Value __
Aggr. DD Level __
GDP Level __
Price Level __
↓
↓
↓
↓
___ X Rates can
- ↓ Currency Speculation
- ↓ Int’l Certainty & Stability
- equate National Prestige
Fixed X Rates
When using Fixed X Rates
DD of currency ↑
⇒ Currency value ___(shortage/surplus)
so it’s ___-valued (over/under)
Shortage
Under-valued
⇒ Export↑
⇒ Money supply↑
⇒ Inflation
⇒ Price level↑ ⇒ Export↓
When using Fixed X Rates
DD of currency ↓
⇒ Currency value ___
(shortage/surplus)
so it’s ___-valued (over/under)
Surplus
Over-valued
⇒ Export↓
⇒ Foreign Reserves↓
⇒ Recession
⇒ Price level↓ ⇒ Export↑
Gov’s 5 strategies
when using Fixed X Rates
& DD of currency↓
1) Tariff/Quota ⇒ Import↓
2) Foreign X Ctrl
3) Voluntary Trade Restrictions
4) Creating Recession
5) Devalue Fixed X Rate
Central Bank allows
currency value to
Float/Fluctuate in a degree
in order to Stabilize X Rate
Managed X Rate or
Dirty Float
An accounting of a country’s
int’l transactions of
Payments & Receipts
of foreign currencies
Balance of Payments
3 Subcategories of
Balance of Payments
1) Current Acct
Exports & Imports
Income/Expenditure
2) Capital Acct
∆ in Ownership of Assets
direct/portfolio inv.
3) Official Settlement Acct
∆ in Foreign X Reserves
= central bank gain/loss foreign currency
Exports of G/S
- ) Imports =?
Net Exports or
Balance of Trade
Income (Wage/Interest/Div)
that Nationals received for
srv to another country
Foreign Factor Income
Status that Bank of Canada
provides Foreign Reserves
⇒ Outflow of Foreign Reserves
when CAD$ is less demanded by foreign
Balance of Pmts Deficit
Status that Bank of Canada
gains Foreign Reserves
in exchange for CAD$
⇒ Inflow of Foreign Reserves
when CAD$ is more demanded by foreign
Balance of Pmts Surplus
____ measures the
comparative purchasing power of a currency
& formula
Real Exchange Rate
. $ in A
RXR = ———-x Nom.X Rate
. $ in B
Why currencies Appreciate/Depreciate?
Demand / Supply of Currencies
A Theory that a country producing more G/S w/ specialized advantage
a.k.a. factor endowment
Theory of Absolute Advantage
- Adam Smith
A Theory that countries prod w/ Lower Opportunity Costs
& Trade for Mutual Gains
Theory of Comparative Adv
- David Ricardo
4 Areas lead to
different specialization in prod
for a conntry
① Climate
② Natural Resources
③ Human Capital
④ Gov Policy
6 Arquments against
Free Trade
① Strategic Industry
② Infant Industry
③ Cultural Identity
④ ↓ Standards of Environmental & Labour
race to the bottom
⑤ negative Multiplier effect
⑥ Unctrl Capital & Labour Movement
When Removing Tariff
Currency Value ↑/↓ ?
Total Value of Trade ↑/↓ ?
& why?
Removing Tariff
⇒ $↓ ⇒ DD for Import ↑
⇒ Supp of Domestic $$ ↑
⇒ Domestic $$ Value ↓
⇒ Export ↑
⇒ Total Value of Trade ↑
(import & export ↑)
