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Unformatted text preview: flight, tax havens Balances evened out Credits Current Debits account Capital account Reserves Total 1000 500 100 1600 Current account 800 Capital account 400 Reserves 200 Total 1400 E&O 200 Balance of Payments and Exchange Rate Regime
2 Kinds of regime Freely Floating Pegged or managed float Freely floating does not use reserves in FE market Peg & MF does Balance of payments and national income accounting The balance of payments is part of the national accounts ( GNP/GDP) This is a functional not just an accounting relationship, and knowing the functional part helps us analyze economies' performance BoP in the GDP Uses of Output Closed economy: Y=C+I+G Open economy Y+M=C+I+G+X Y=C+I+G+(X-M) Eq.1 Uses of Income: Y=C+Sp+T Eq. 2 putting 1 & 2 together C+I+G+(X-M) = C + Sp +T and rearranging yields Domestic saving and the current account (X - M) = (Sp - I) + (T- G) .. Eq 3 The time path of Eq 3 The US situation Thinking about the US trade balance in the perspective of the US trade deficit What's the role of the capital/financial account?...
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- Spring '10