AEM230___Lecture_17___Fall_07___Eswar_Prasad_Lecture

AEM230___Lecture_17___Fall_07___Eswar_Prasad_Lecture - U.S...

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U.S. - China Trade Relationship A Window into Key Concepts in  International Finance 
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Chinese Exports to US as % of Total Chinese Exports 0 5 10 15 20 25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year (in percent)
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US Exports to China as % of Total US Exports 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year (in percent)
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US China Trade Balance (as % of US GDP) -1 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year (in percent)
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 China US
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 China US
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Balance of Payments Current Account = Exports - Imports + Net Factor Inflows Capital Account = Inflows - Outflows Current Account + Capital Account = 0
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Capital Flows Foreign Direct Investment Portfolio Equity Portfolio Debt Sovereign Debt Other
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Balance of Payments Current Account + Capital Account = Net Reserve Accumulation
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Reserves Foreign Exchange Reserves Gold Special Drawing Rights at IMF
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Balance of Payments Current Account + Capital Account + Errors and Omissions = Net Reserve Accumulation
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A Different View of the Current  Account Current Account = Saving - Investment = (Output - Private Consumption - Government Consumption) - Investment
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The Exchange Rate RMB per U.S. $ = 8.2 US $ per RMB = 0.12
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The Exchange Rate Then: RMB per U.S. $ = 8.2 US $ per RMB = 0.12 Now: RMB per U.S. $ = 7.6 US $ per RMB = 0.13
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The Real Exchange Rate 1 $ / 8 Y Price of pen = 4 Y Price of pen = 0.5 $ (1 $ / 8 Y) x (4 Y/ 0.5 $) = 1
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Real Exchange Rate Appreciation 1 $ / 8 Y Price of pen = 8 Y Price of pen = 0.5 $ (1 $ / 8 Y) x (8 Y/ 0.5 $) = 2
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