open economy macroeconomics Flashcards
What is the foreign exchange market?
It is the global decentralised marketplace for trading of currencies where foreign exchange rates are determined.
What are foreign exchange rates?
They are the rates at which one currency is converted to another.
Why do we need foreign exchange rates and a foreign exchange market?
International Investment
Foreign trade
Comparison of international costs and prices
Determining rates
Why do people demand foreign exchange?
Imports Tourism Investments Abroad foreign transfer payments foreign exchange Speculation Comparative Advantage
What are the sources of foreign exchange?
exports Foreign Investment in domestic country Remittances Gifts, Donations Interest Received on loans to abroad Loans and Grants from abroad tourism in domestic country factor income from abroad
What are the different ways to determine exchange rates?
FIXED EXCHANGE RATES
- government intervention
- need large amounts of currency reserves both domestic and international
- rate should be supported by reserves
FLOATING EXCHANGE RATES
- market forces of demand and supply
- flexibility
- do not need large stocks of reserves
- automatically take care of BOP deficits
- independence in conducting monetary policy
MANAGED FLOATING
- sometimes government intervenes when appropriate
- dirty floating
moderate exchange rates
What do flexible exchange rates depend upon?
INCOME - exports and imports
PURCHASING POWER PARITY
INTEREST RATES
basically id demand increase currencydepreciates value increase becomes more expensive smaller number
the same happens if supply decreases - decrease in exchange rate -depreciation
What is the balance of payments?
It refers to the systematic record of all economic transactions between the residents of a country and the rest if the world within a given time period
What are economic transactions?
They refer to those transactions which involve the transfer of ownership or title of goods service money or assets
How are economic transactions categorised?
TRADE TRANSACTIONS
- trade of goods and services
- visible items - goods - trade is open - can be verified by custom officials
- invisible items - services
UNILATERAL TRANSFERS
- one way transactions
- claim no repayment
- gifts
- grants
- remittances
CAPITAL TRANSACTIONS
- capital receipts
- capital expenditure
What is the structure of balance of payments?
CREDIT SIDE AND DEBIT SIDE
- credit - receipts or inflows of foreign exchange
- debit - payments - outflows of foreign exchange
BALANCED, SURPLUS AND DEFICIT
- balanced - c=d
- surplus - c>d
- deficit - c
What are the components of balance of payments?
CURRENT ACCOUNT - Trade of goods - Trade of services - NEt Income (Factor and non-factor-shipping, bankimg and insurance) Unilateral transfers Interests profits and dividends it makes
CAPITAL ACCOUNT
- change in assets or liabilities
- borrowings and lendings(+their repaymeny)
- investments to and from abroad
direct - control of asset - indirect no control of asset
What are autonomous transactions?
They are the transactions that are made for reasons other than maintaining a balanced BOP such as for profit maximisation
- trade of goods and services
- above the line
- both capital and current account
What are accommodating transactions?
They are transactions that are made for correcting errors in BOP such as deficits or surplus caused due to autonomous transactions. Borrowings from IMF
- only capital account
- below the line
