The Exchange Rates

The Balance of Payments

Gains From Trade

·specialization in production from division of labor, economies of scale, scope, and agglomeration;

·a resulting increase in total output possibilities;

·trade through markets from sale of one type of output for other, more highly valued goods.

International Trade Policy is a governmental policy governing trade with third countries. This covers tariffs, trade subsidies, import quotas, Voluntary Export Restraints, restrictions on the establishment of foreign-owned businesses, regulation of trade in services and other barriers to international trade.

The balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers.

Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

When all components of the BOP sheet are included it must balance that is, it must sum to zero there can be no overall surplus or deficit.

As if Y = C + I + G + (X - M)

Y - C - G = C + I + G + (X - M) - (C + G),

where Y - C - G is S_n - national saving

S_n = I + (X - M)

(I - S_n )+ (X - M) = 0

It is a neutral representation of the balance of payments in the regime of flexible exchange rate.

If national investment is higher than national saving (I > Sn) investment excess should be financed from abroad. That means net export is negative (Xn<0) and state is a debtor on international market. And vise versa.

A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.

The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. When we say exchange rate we usually mean nominal exchange rate.

The "real exchange rate" (RER) is the purchasing power of two currencies relative to one another. It is based on the GDP deflator measurement of the price level in the domestic and foreign countries (P, P f), which is arbitrarily set equal to 1 in a given base year.

Equilibrium real exchange rate sets on intersection of S_n-I and Xn graphs. In this point the supply of the national currency as credit for abroad balances the demand for national currency presented foreigners buying net exports from the country.

The changes of the RER are instead informative on the evolution over time of the relative price of a unit of GDP in the foreign country in terms of GDP units of the domestic country. If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the GDP deflators of the two countries, and the RER would be constant and equal to one.

A flexible exchange rate system is a currency system that allows the exchange rate to be determined by supply and demand.

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.

Дата добавления: 2014-01-11