Lesson_60_The Exchange Rate & the current account

Lesson_60_The Exchange Rate & the current account -...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Lesson 60 1 The Exchange Rate and the Current Account When the dollar depreciates, U.S. goods and services become more attractive relative to foreign goods and services Demand for U.S. goods and services increases, demand for foreign goods and services falls This lesson explores the implications of exchange rate movements for the CA Lesson 60 2 First, some terminology Simplify by thinking of the current account as just EX IM An “improvement” in the current account is defined as a situation where EX IM becomes algebraically larger e.g., if the current account is initially in deficit, the magnitude of the deficit diminishes, or maybe the CA even turns into a surplus Lesson 60 3 A deterioration in the current account is the reverse Period 1 Value of CA Period 2 Improve/Deteriorate? Deteriorate -100 -150 Improve -100 25 Improve -100 -75
Background image of page 1

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

View Full Document Right Arrow Icon
2 Lesson 60 4 Examples where the CA initially surplus Period 1 Value of CA Period 2 Improve/Deteriorate? 50 60 Improve 50 -20 Deteriorate Deteriorate 50 40 Lesson 60 5 Presumption that a depreciation in value dollar will result in improvement in current account… …Appreciation of dollar will result in deterioration of current account But it may not work that way Lesson 60 6 Depreciation of dollar will increase value of exports, but may also increase value of imports! Intuition When dollar depreciates relative to pound, British goods become more expensive for Americans
Background image of page 2
3 Lesson 60 7 Suppose Americans don’t reduce demand for British goods by very much For simplicity, assume quantity demanded
Background image of page 3

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

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 12

Lesson_60_The Exchange Rate & the current account -...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online