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Lecture #11- Open Economy and Exchange Rates.pdf

Lecture #11- Open Economy and Exchange Rates.pdf - Unit 11...

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Unit 11: Open Economy and Exchange Rates Session 11 (Source: Sloman, J. 2006, Economics , FT Pearson, Harlow) Chapter 14 and 24
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Learning Objectives At the end of the lesson, students will be able to: 1. Identify the main components of the balance of payment account and its relationship to the exchange rate. 2. Distinguish between the nominal and real exchange rates. 3. Identify the various types of exchange rate regimes. 4. Demonstrate how an exchange rate is determined. 5. Discuss the advantages and disadvantages of floating exchange rates. 6. Demonstrate how a fixed exchange rate works.
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The Open Economy The Balance of Payments
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THE BALANCE OF PAYMENTS Meaning of the balance of payments The current account trade in goods: records domestic payments for imports and receipts of payments for exports of goods. Also known as balance of visible trade or merchandise trade.
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UK balance of payments: 2004 (£ millions) CURRENT ACCOUNT 1. Trade in goods a) Exports b) Imports Balance on trade in goods 2. Trade in services a) Exports +190 688 –48 632 –57 944 +95 872 b) Imports Balance on trade in services Balance on trade in goods and services 3. Net income flows (wages and investment income) 4. Net current transfers (government and private) Current account balance –76 754 +19 118 –38 826 +24 004 –10 860 –25 682
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THE BALANCE OF PAYMENTS Meaning of the balance of payments The current account trade in services: records domestic payments for imports and receipts of payments for exports of services. Also known as balance of invisible trade.
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UK balance of payments: 2004 (£ millions) CURRENT ACCOUNT 1. Trade in goods a) Exports b) Imports Balance on trade in goods 2. Trade in services a) Exports +190 688 –48 632 –57 944 +95 872 b) Imports Balance on trade in services Balance on trade in goods and services 3. Net income flows (wages and investment income) 4. Net current transfers (government and private) Current account balance –76 754 +19 118 –38 826 +24 004 –10 860 –25 682
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UK balance of payments: 2004 (£ millions) CURRENT ACCOUNT 1. Trade in goods a) Exports b) Imports Balance on trade in goods 2. Trade in services a) Exports +190 688 –48 632 –57 944 +95 872 b) Imports Balance on trade in services Balance on trade in goods and services 3. Net income flows (wages and investment income) 4. Net current transfers (government and private) Current account balance –76 754 +19 118 –38 826 +24 004 –10 860 –25 682
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THE BALANCE OF PAYMENTS The current account square4 current transfers and income flows: records income flows in terms of wages, interests and profits flowing in and out of a country and net current transfers from governments and other international organisations.
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UK balance of payments: 2004 (£ millions) CURRENT ACCOUNT 1. Trade in goods a) Exports b) Imports Balance on trade in goods 2. Trade in services a) Exports +190 688 –48 632 –57 944 +95 872 b) Imports Balance on trade in services Balance on trade in goods and services 3. Net income flows (wages and investment income) 4. Net current transfers (government and private) Current account balance –76 754 +19 118 –38 826 +24 004 –10 860 –25 682
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UK balance of payments:
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