{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

LECTURE NOTES Chapter 38

LECTURE NOTES Chapter 38 - CHAPTER THIRTY-EIGHT EXCHANGE...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER THIRTY-EIGHT EXCHANGE RATES, THE BALANCE OF POWER, AND TRADE DEFICITS INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Explain how U.S. exports create a demand for dollars and a supply of foreign exchange; and how U.S. imports create a demand for foreign exchange and a supply of dollars. 2. Explain and identify the various components of the balance of payments. 3. Identify trade and balance of payments deficits or surpluses when given appropriate data. 4. Explain how a nation finances a “deficit” and what it does with a “surplus.” 5. Explain how exchange rates are determined in a flexible system. 6. Explain how flexible exchange rates eliminate balance of payments disequilibria. 7. List five determinants of exchange rates. 8. List three disadvantages of flexible exchange rates. 9. List three ways a nation could control exchange rates under a fixed-rate system. 10. Describe a system based on the gold standard, the Bretton Woods system, and a managed float exchange rate system. 11. Identify the pros and cons of each of the above three systems. 12. Explain the so-called crisis in foreign trade and identify three of its causes. 13. Describe two effects of a trade deficit. 14. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Financing International Trade A. Foreign exchange markets enable international transactions to take place by providing markets for the exchange of national currencies. B. An American export transaction is illustrated in Figure 38-1. 1. U.S. firm is selling $30,000 worth of computers to British firm. 2. The exchange rate is $2 = 1 Br. pound, so the British firm must pay 15,000 pounds. 3. The British firm will draw a check on its deposit at a London bank for 15,000 pounds, and will send it to the U.S. exporter. 4. The exporter sells the British check to an American bank for $30,000 in exchange for the British check, and the exporter’s account is credited. 5. The American bank will deposit the 15,000 pounds in a correspondent London bank for future sale. 488
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Exchange Rates, the Balance of Power, and Trade Deficits 6. Note the major points here. a. Exports create a demand for dollars and a supply of foreign money, in this case British pounds. b. The financing of an American export reduces the supply of money (demand deposits) in Britain and increases it in the U.S. C. An American import transaction is illustrated in Figure 38-2. This example illustrates how a British exporter is paid in pounds while the importer pays dollars. 1. A U.S. firm is buying 15,000 pounds worth of compact disks from Britain. 2. The exchange rate remains at $2 = 1 Br. pound, so the American purchaser must exchange its $30,000 for 15,000 Br. pounds at an American bank—perhaps the same one as in the export example.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern