Economics 100B - 22 (4-5-07)

Economics 100B - 22 (4-5-07) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 4/05/07 Lecture 22 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course ANNOUCEMENTS We still do not have all the grades in from the GSI so we don’t have the exact figures, but it looks like the median is going to be around 66 or 67. Re-grade guidelines are posted on the website. They are the same as the previous midterm and are due in by next Thursday at the end of class. If you are one of the few people who took the exam at a different time or location, see me after class to get your exam. LECTURE Last time, we discussed exchange rates and how supply and demand determined the exchange rate. Today, we will discuss the concept of the Balance of Payments. The Balance of Payments gives us the difference between the supply and demand factors in exchange rates. We will also discuss capital mobility or how easy capital moves in and out of a country. Balance of Payments The supply and demand for a country’s currency can be summarized in its balance of payments. There are three parts to Balance of Payments: 1) Current Account, C/A. (This can broadly be thought of as net exports) 2) (Private) Capital Account, K/A. This is what the private sector is doing rather than the government. 3) Official Transaction Account, OT/A. These are transactions by the government usually via central banks. The Current Account The current account also has three components: 1) Net exports of goods and services, X – M. Remembers, exports gave us a demand for our currency and imports give us a supply. (Large portion of C/A) 2) Net investment income. (Small portion of C/A) 3) Net transfer payments. (Small portion of C/A) The current account balance is given by: C/A = X – M X = Xo + xYf – Ф eR M = Mo + mY + ψ eR = Xo + xYf – Ф eR – Mo – mY – ψ eR = (Xo – Mo + xYf) – ( Ф + ψ )eR – mY Where (Xo – Mo + xYf) is exogenous.
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Economics 100B - 22 (4-5-07) - Economics 100B Professor...

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