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1、1 of 49chapter: 342009 Worth PublishersOpen-Economy Macroeconomics2 of 49WHAT YOU WILL LEARN IN THIS CHAPTERThe meaning and measurement of the balance of paymentsThe determinants of international capital flowsThe role of the foreign exchange market and the exchange rateThe importance of real exchang
2、e rates and their role in the current accountThe considerations that lead countries to choose different exchange rate regimes, such as fixed exchange rates and floating exchange rates3 of 49WHAT YOU WILL LEARN IN THIS CHAPTERWhy open-economy considerations affect macroeconomic policy under floating
3、exchange rates4 of 49Capital Flows And The Balance Of PaymentsA countrys balance of payments accounts summarize its transactions with the rest of the world. The balance of payments on current account, or current account, includes the balance of payments on goods and services together with balances o
4、n factor income and transfers. The merchandise trade balance is a frequently-cited component of the balance of payments on goods and services. 5 of 49Capital Flows And The Balance Of PaymentsA countrys balance of payments on financial account, or simply its financial account, is the difference betwe
5、en its sales of assets to foreigners and its purchases of assets from foreigners during a given period.6 of 49Capital Flows And The Balance Of PaymentsExample: The Costas Financial Year7 of 49The U.S. Balance of Payments, 20078 of 49The Balance of Payments9 of 49FOR INQUIRING MINDSGDP, GNP, and the
6、Current AccountWhy doesnt the national income equation use the current account as a whole? Gross domestic product, which is the value of goods and services produced in a country, doesnt include two sources of income that are included in calculating the current account balance: international factor i
7、ncome and international transfers. For example, the profits of Ford Motors U.K. arent included in Americas GDP and the funds Latin American immigrants send home to their families arent subtracted from GDP.Gross national product does include international factor income. 10 of 49FOR INQUIRING MINDSGDP
8、, GNP, and the Current AccountEstimates of U.S. GNP differ slightly from estimates of GDP.GNP adds in items such as the earnings of U.S. companies abroad and subtracts items such as the interest payments on bonds owned by residents of China and Japan. Economists use GDP rather than a broader measure
9、 because:the original purpose of the national accounts was to track production rather than income.data on international factor income and transfer payments are generally considered somewhat unreliable. 11 of 49Trade Reciprocity12 of 49GLOBAL COMPARISONCA Surpluses and Deficits13 of 49The Loanable Fu
10、nds Model - Revisited14 of 49Loanable Funds Markets in Two Countries 15 of 49International Capital Flows16 of 49FOR INQUIRING MINDSA Global Savings Glut?In 2005, Ben Bernanke said that the “principal causes of the U.S. current account deficit” were from outside the country. He argued that special fa
11、ctors had created a “global savings glut” that had pushed down interest rates worldwide.What caused this global savings glut? According to Bernanke, the main cause was the series of financial crises that began in Thailand in 1997; moved across much of Asia; then hit Russia in 1998, Brazil in 1999, a
12、nd Argentina in 2002.As a result, a number of these countries experienced large capital outflows. For the most part, the capital flowed to the United States.17 of 49ECONOMICS IN ACTIONThe Golden Age of Capital FlowsThe golden age of capital flows actually preceded World War Ifrom 1870 to 1914. Durin
13、g this period, Britain offered investors a higher return and attracted capital inflows.During the golden age of capital flows, the big recipients of capital from Europe were also places to which large numbers of Europeans were moving. These large-scale population movements were possible before World
14、 War I because there were few legal restrictions on immigration. Modern governments often limit foreign investment because they fear it will diminish their national autonomy. In the nineteenth century, such actions were rare.18 of 49The Role Of The Exchange RateCurrencies are traded in the foreign e
15、xchange market.The prices at which currencies trade are known as exchange rates.When a currency becomes more valuable in terms of other currencies, it appreciates.When a currency becomes less valuable in terms of other currencies, it depreciates.19 of 49The Foreign Exchange Market20 of 49Equilibrium
16、 Exchange RateThe equilibrium exchange rate is the exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied.21 of 49Equilibrium in the Foreign Exchange MarketA Hypothetical Example22 of 49PITFALLSWhich Way is Up?Suppose someone says,
17、 “The U.S. exchange rate is up.” What does that person mean? Sometimes the exchange rate is measured as the price of a dollar in terms of foreign currency.Sometimes the exchange rate is measured as the price of foreign currency in terms of dollars. You have to be particularly careful when using publ
18、ished statistics. For example, Mexican officials will say that the exchange rate is 10, meaning 10 pesos per dollar. But Britain, for historical reasons, usually states its exchange rate the other way around. 23 of 49An Increase in the Demand for U.S. Dollars24 of 49Effects of Increased Capital Infl
19、ows25 of 49Real Exchange RatesReal exchange rates are exchange rates adjusted for international differences in aggregate price levels.Real exchange rate = Mexican Pesos per U.S. dollars PUS /PMex26 of 49Real versus Nominal Exchange Rates27 of 49Purchasing Power ParityThe purchasing power parity betw
20、een two countries currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country.28 of 49Purchasing Power Parity29 of 49FOR INQUIRING MINDSBurgernomicsThe Economist has produced an annual comparison of the cost of a McDonalds Big Mac
21、in different countries. The Big Mac index looks at the price of a Big Mac in local currency and computes the following: the price of a Big Mac in U.S. dollars using the prevailing exchange rate.the exchange rate at which the price of a Big Mac would equal the U.S. price. If purchasing power parity h
22、eld, the dollar price of a Big Mac would be the same everywhere.Estimates of purchasing power parity based on the Big Mac index are relatively consistent with more elaborate measures. 30 of 49ECONOMICS IN ACTIONLow-Cost AmericaWhy were European automakers, such as Volvo and BMW, flocking to America?
23、 To some extent because they were being offered special incentives. But the big factor was the exchange rate. In the early 2000s one euro was, on average, worth less than a dollar; by the summer of 2008 the exchange rate was around 1 = $1.50. This change in the exchange rate made it substantially ch
24、eaper for European car manufacturers to produce in the United States than at home.31 of 49ECONOMICS IN ACTIONU.S. Net Exports, 1947-200832 of 49Exchange Rate PolicyAn exchange rate regime is a rule governing policy toward the exchange rate.A country has a fixed exchange rate when the government keep
25、s the exchange rate against some other currency at or near a particular target.A country has a floating exchange rate when the government lets the exchange rate go wherever the market takes it.33 of 49Exchange Market InterventionGovernment purchases or sales of currency in the foreign exchange marke
26、t are exchange market interventions.Foreign exchange reserves are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market.Foreign exchange controls are licensing systems that limit the right of individuals to buy foreign currency.34 of 49Exchange
27、 Market Intervention35 of 49Exchange Rate Regime DilemmaExchange rate policy poses a dilemma: there are economic payoffs to stable exchange rates, but the policies used to fix the exchange rate have costs.Exchange market intervention requires large reserves, and exchange controls distort incentives.
28、If monetary policy is used to help fix the exchange rate, it isnt available to use for domestic policy.36 of 49FOR INQUIRING MINDSThe Road to the Euro37 of 49ECONOMICS IN ACTIONChina Pegs the YuanChinas spectacular success as an exporter led to a rising surplus on current account. At the same time,
29、non-Chinese private investors became increasingly eager to shift funds into China, to take advantage of its growing domestic economy. As a result of the current account surplus and private capital inflows, at the target exchange rate, the demand for yuan exceeded the supply.To keep the rate fixed, C
30、hina had to engage in large-scale exchange market interventionselling yuan, buying up other countries currencies (mainly U.S. dollars) on the foreign exchange market, and adding them to its reserves. 38 of 49Exchange Rates And Macroeconomic PolicyA devaluation is a reduction in the value of a curren
31、cy that previously had a fixed exchange rate.A revaluation is an increase in the value of a currency that previously had a fixed exchange rate.39 of 49Monetary Policy Under Floating Exchange RatesUnder floating exchange rates, expansionary monetary policy works in part through the exchange rate: cut
32、ting domestic interest rates leads to a depreciation, and through that to higher exports and lower imports, which increases aggregate demand. Contractionary monetary policy has the reverse effect.40 of 49Monetary Policy and the Exchange Rate41 of 49International Business CyclesThe fact that one coun
33、trys imports are another countrys exports creates a link between the business cycle in different countries. Floating exchange rates, however, may reduce the strength of that link.42 of 49ECONOMICS IN ACTIONThe Joy of a Devalued PoundOn September 16, 1992, Britain abandoned its fixed exchange rate po
34、licy. The pound promptly dropped 20% against the German mark, the most important European currency at the time.The British government would no longer have to engage in large-scale exchange market intervention to support the pounds value. The devaluation would increase aggregate demand, so the pounds
35、 fall would help reduce British unemployment.Because Britain no longer had a fixed exchange rate, it was free to pursue an expansionary monetary policy to fight its slump. 43 of 49SUMMARY1. A countrys balance of payments accounts summarize its transactions with the rest of the world. The balance of
36、payments on current account, or current account, includes the balance of payments on goods and services together with balances on factor income and transfers. The merchandise trade balance, or trade balance, is a frequently cited component of the balance of payments on goods and services. The balanc
37、e of payments on financial account, or financial account, measures capital flows. By definition, the balance of payments on current account plus the balance of payments on financial account is zero.44 of 49SUMMARY2. Capital flows respond to international differences in interest rates and other rates
38、 of return; they can be usefully analyzed using an international version of the loanable funds model, which shows how a country where the interest rate would be low in the absence of capital flows sends funds to a country where the interest rate would be high in the absence of capital flows. The und
39、erlying determinants of capital flows are international differences in savings and opportunities for investment spending. 45 of 49SUMMARY3. Currencies are traded in the foreign exchange market; the prices at which they are traded are exchange rates. When a currency rises against another currency, it
40、 appreciates; when it falls, it depreciates. The equilibrium exchange rate matches the quantity of that currency supplied to the foreign exchange market to the quantity demanded.4. To correct for international differences in inflation rates, economists calculate real exchange rates, which multiply t
41、he exchange rate between two countries currencies by the ratio of the countries price levels. The current account responds only to changes in the real exchange rate, not the nominal exchange rate. Purchasing power parity is the exchange rate that makes the cost of a basket of goods and services equa
42、l in two countries. It is a good predictor of actual changes in the nominal exchange rate.46 of 49SUMMARY5. Countries adopt different exchange rate regimes, rules governing exchange rate policy. The main types are fixed exchange rates, where the government takes action to keep the exchange rate at a
43、 target level, and floating exchange rates, where the exchange rate is free to fluctuate. Countries can fix exchange rates using exchange market intervention, which requires them to hold foreign exchange reserves that they use to buy any surplus of their currency. Alternatively, they can change dome
44、stic policies, especially monetary policy, to shift the demand and supply curves in the foreign exchange market. Finally, they can use foreign exchange controls.47 of 49SUMMARY6. Exchange rate policy poses a dilemma: there are economic payoffs to stable exchange rates, but the policies used to fix t
45、he exchange rate have costs. Exchange market intervention requires large reserves, and exchange controls distort incentives. If monetary policy is used to help fix the exchange rate, it isnt available to use for domestic policy. 7. Fixed exchange rates arent always permanent commitments: countries w
46、ith a fixed exchange rate sometimes engage in devaluations or revaluations. In addition to helping eliminate a surplus of domestic currency on the foreign exchange market, a devaluation increases aggregate demand. Similarly, a revaluation reduces shortages of domestic currency and reduces aggregate
47、demand.48 of 49SUMMARY8. Under floating exchange rates, expansionary monetary policy works in part through the exchange rate: cutting domestic interest rates leads to a depreciation, and through that to higher exports and lower imports, which increases aggregate demand. Contractionary monetary policy has the reverse effect.9. The fact that one countrys imports are another countrys exports creates a link between the business cycle in different countries. Floating exchange rates, however, may reduce the strength of that link.49 of 49The End
