Balance of Trade & Balance of Payments

BALANCE OF TRADE VS BALANCE OF PAYMENTS
• Net exports = Exports - imports
• Trade surplus = Exporting more than is imported.
• Trade deficit = Exporting less than is imported.

BALANCE OF PAYMENTS (BOP)
• Balance of trade includes only goods and services but balance of payments considers all international transactions
• Balance of payments is a broader measure of international trade.

Details
• The BOP summary is within a given year.
• Prepared in the domestic country's currency
• The balance of payments is made up of two accounts. The CURRENT ACCOUNT and the CAPITAL ACCOUNT.

Current account
• Made up of three parts
24. Trade goods and services
• Net exports- difference between a nation's exports of goods and services and
its imports of goods and services.
2. Investment income - Income from the factors of productions including payments
made to foreign investors
• Money earned by a Japanese car company in the US
3. Net Transfers - Money flows from the private or public sectors
• Donations, aids, and grants

CAPITAL ACCOUNT
The capital account measures the purchase and sales of financial assets abroad.
Purchases of things that stay in the foreign country
Examples:
- US company buys hotel in Russia
- A korean company sells a factory in Ohio
- Australian company buys the Temple Mall.

PRACTICE
25. U.S income increases relative to other countries. Does the balance of payments move towards a deficit or a surplus?
- Imports are cheaper
- Americans import more
- Net exports
- The current account balance decreases and moves toward a DEFICIT

FOREIGN EXCHANGE (FOREX)
Exchange rate = Relative price of currencies

EXPORTS AND IMPORTS
26. US sells cars to mexico
27. Mexico buys tractors from Canada
28. Canada sells syrup to the US
29. Japan buys fireworks from mexico
• For all these transactions, there are different national currencies
• Each country must be paid in their own currency
• The buyer (Importer) must exchange their currency for that of the sellers (exporter)

The turnover in forex markets is almost $4 trillion (USD) a day

EXCHANGE RATES
• In the FOREX market we only look at two countries currencies at a time
• Ex. US Dollars and british pounds
• We examine the price of one currency in terms of the other currency
• The Exchange Rate depends on which currency you are converting.
• The price of one US Dollar in terms of the pound is
- 1 Dollar = £1/$2 =£.5
What happens if you need more dollar to buy one pound (the price for a dollar pound to increases?)
• The US Dollar DEPRECIATES relative to the pound
Depreciation:
- The loss of value of a country's currency with respect to a foreign currency
- More units of Dollars are needed to buy a single unit of the other currency
- At this point the dollar is said to be weaker.

What happens if you need less dollars to buy one pound?
• The US Dollar APPRECIATES relative to the pound
Appreciation:
- The increase of value of a country's currency with respect tot the foreign currency
- Less units of dollars are needed to buy a single unit of the other currency
- The dollar is said to be "stronger"

FOREX supply and demand
Imagine a huge table with all the different currencies from another country
This is the foreign exchange market!
• just like the product market, you can't take things without paying
• If you demand one currency you must supply your currency.

FOREX SHIFTERS
30. Changes in Tastes
EX. British Tourists flock to the U>S
- Demand for U.S dollars increases (Shifts Right)
- Supply of British pounds increases (Shifts right)
Pound depreciates
Dollar appreciates
2. Changes in relative incomes
Ex. US growth increases US incomes
- US buys more imports
- US demand for pounds increases
- Supply for US dollars increases.
3. Changes in relative price level
Ex. US Increase relative to Britain
- US demand for cheaper imports increases
- US demand for pounds increases
Supply for US dollars increases
Pound Appreciates
Dollar Depreciates
4. Changes in relative interest rates
EX US has higher interest rate than Britain
- British people want to invest in US
- Capital flow increases towards the US
- British Demand for US Dollars increases
- British supply more pounds
Pound depreciates
Dollar appreciates