Instructor18Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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INSTRUCTOR COMMENTARY Chapter Reference: Chapter 18 (pp. 470-485) The Balance of Payments, Exchange Rates, And Macro Policy in an Open Economy 1. In Chapter 18, the textbook combines a discussion of the basis for international trade (which we discussed in Lecture 2) with information on the international financing of such trade. For this class, I have chosen to introduce the basis for trade (opportunity cost differences) in Chapter 2, and so we concentrate here on the international payment systems that facilitate international trade. As a result, many of the topics covered in Lecture 16 are not addressed in the text. For this reason, text references do not appear in this commentary. 2. International specialization and trade does not occur in a barter setting. Rather, international payments systems must be established to facilitate international trade. These payment systems result in international payments and receipts, measured in a country’s national currency, which may be summarized in a Balance of Payments (BOP) statement. For the United States, any international financial transaction that results in an inflow of dollars from the rest-of-the-world is classified as a credit, and similar transactions that in an outflow of dollars is classified as a debit to the BOP. A simplified BOP account for the United States for 2006 is provided in Table 16.1 of Lecture 16. 3. Among the principles of BOP accounting, the following are especially important: A. The current account measures the dollar inflows and outflows associated with the movement of goods and services, income on existing investments, and unilateral transfer payments. B. The capital account measures changes in U.S. ownership of real or financial assets (companies or stocks and bonds) held outside the United States and of the rest-of-the-world’s holdings of real or financial assets in the United States. It also includes changes in dollars held by private and government entities outside of the U.S. and changes in foreign currencies held by U.S. private and government entities. C. The “balance of trade ” measures only the dollar value of merchandize exports and imports in a given year. It constitutes the largest, but not the only, component of the current account of the BOP. D. The overall BOP must balance each year in an accounting sense. Every dollar that leaves the U.S. each year must be used to buy U.S. goods and services, or to purchase real or financial assets in the U.S., or held as foreign exchange reserves in the private or government sectors of the rest-of-the-world. In this sense, the BOP always “balances.” 1
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E. Even though the overall BOP must “balance,” not every account in the BOP must balance. If, for a moment, we ignore income flows on existing investments and unilateral transfer payments, the current account balance is determined by the dollar value of exports and imports of goods and services. If X>M, then the current account is in surplus. If X<M, the current account is in deficit. If X=M, the current
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Instructor18Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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