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12 I NTERNATIONAL  L INKAGES FOCUS OF THE CHAPTER • This chapter  provides  an introduction  to international  macroeconomics. • The IS-LM model is adapted  to this new, open  economy  setting.  The effects of fiscal and   monetary  policy are shown  to depend  strongly on whether  exchange  rates are fixed or floating,   and  on whether  capital is more or less mobile (able to move across borders  in response  to   interest differentials). • The difference between  fixed and  floating  exchange  rates is explained,  as is the difference   between  real and  nominal  exchange  rates. SECTION SUMMARIES 1. The Balance of Payments and Exchange Rates The  balance of payments  measures  the difference between  payments  entering  and  payments   leaving  the country.  We break these payments  down  into payments  for goods  and  services kept  track of in the  current account and  payments  for assets recorded  in the  capital  account .   The current  account  consists of the  trade balance the difference between  the money  we receive  for exporting  goods  abroad  and  the money  we pay  for goods  that we import  from abroad of the  difference between  the value of the services we export  and  the services we import, and  of the   difference between  the value of the gifts (transfers) that we send  to foreigners and  those that we   receive from them.  The current  account  is in surplus  when  these transactions  cause more money   to flow into the country  than  to flow out of it.  It is in deficit whenever  they cause more money  to   flow out of the country  than  to flow into it. The capital account  keeps track of the sales and  purchases  of assets like stocks, bonds, land, and   bank  deposits.  There is a capital account  surplus  whenever  the revenue  from our sales of these   assets exceeds the revenue  from our purchases  of them.   125
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126 C HAPTER  12 Both the private sector and  the central bank  buy and  sell assets; the purchases  and  sales of assets   by the central bank  are referred  to as  official reserve transactions . There are some simple guidelines that will help you with balance of payments accounting :   • Any transaction  that causes money  to flow into a country  increases the balance of payments.   • Any transaction  that causes money  to flow out of a country  lowers the balance of payments.   • When  the money  results from the sale or purchase of goods  and  services or takes the form of  a transfer, the change is recorded  in the current  account.  • When  the money  results from the sale or purchase of assets, the change is recorded  in the  
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This note was uploaded on 12/02/2011 for the course ECON 209 taught by Professor Dr.martin during the Spring '09 term at Charleston.

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