Chap023 - Chapter 23 Price Adjustments and...

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Chapter 23 – Price Adjustments and Balance-of-Payments Disequilibrium CHAPTER 23 PRICE ADJUSTMENTS AND BALANCE-OF-PAYMENTS DISEQUILIBRIUM Learning Objectives: To understand how changes in exchange rates affect the movement of goods and services and the trade balances of countries. To grasp how price elasticity of demand relates to the stability of foreign exchange markets. To understand how the price adjustment mechanism functions under a system of fixed or pegged exchange rates. I. Outline Introduction - Price Adjustment: The Exchange Rate Question The Price Adjustment Process and the Current Account under a Flexible-Rate System - The Demand for Foreign Goods and Services and the Foreign Exchange Market - Market Stability and the Price Adjustment Mechanism - The Price Adjustment Process: Short Run vs. Long Run The Price Adjustment Mechanism in a Fixed Exchange Rate System - Gold Standard - The Price Adjustment Mechanism and the Pegged Rate System Summary Appendix: Derivation of the Marshall-Lerner Condition II. Special Chapter Features Concept Box 1: Elasticity of Import Demand and the Supply Curve of Foreign Exchange When Demand Is Linear In the Real World: Estimates of Import and Export Demand Elasticities In the Real World: Exchange Rate Pass-Through of Foreign Exports to the United States In the Real World: Japanese Export Pricing and Pass-Through in the 1990s In the Real World: Lagged Response of Net Exports to Exchange Rate Changes In the Real World: Exchange Rate Regimes in Transition Economies 23-1
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Chapter 23 – Price Adjustments and Balance-of-Payments Disequilibrium III. Purpose of Chapter The purpose of this chapter is to introduce the students to the manner in which changes in the exchange rate affect the current account. The material forms a necessary foundation for the later macro policy chapters in the text. IV. Teaching Tips A. It often appears that the prices of foreign goods do not change as expected with respect to changes in the exchange rate. It is useful to focus on the fact that this can be influenced both by market characteristics and by the nature of the foreign exchange rate regime that is in place. B. The characteristics of the foreign exchange market are critical to understanding the nature of the adjustment process. We have found that linking the foreign demand schedule for home goods and services to the supply schedule of foreign currency by numerical example is a useful way to demonstrate how an unstable foreign exchange market can result from inelastic demand for traded goods. A backward-sloping supply curve of foreign exchange is not necessarily an unlikely possibility in the short run. C. We do not feel that it is useful to expend too much effort on the Marshall-Lerner condition. Consequently, the derivation is in an appendix. The Marshall-Lerner condition is, however, a useful vehicle to drive home the basic idea that foreign exchange market stability properties are the consequence of both demand and supply considerations. Using estimates such
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Chap023 - Chapter 23 Price Adjustments and...

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