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IB Economics SL Review Guide
1 - The Foundations
2 - Supply and Demand
3 - Elasticities
4 - Government Intervention
5 - Market Failure
8 - Overall Economic Activity
9 - AD and AS
10 - Macroeconomic Objectives
11 - Macroeconomic Objectives
12 - Demand-side and Supply-side Policies
13 - International Trade
14 - Exchange Rates and Balance of Payments
15 - Economic Integration
16 - Economic Development Intro
17 - Economic Development Topics
18 - Foreign Finance and Debt
19 - Consequences of Growth and Integration
[The whole document is available for free on Scribd - but you can support this with a purchase and get a downloadable PDF file!]
IB Economics SL Review Guide
1 - The Foundations
2 - Supply and Demand
3 - Elasticities
4 - Government Intervention
5 - Market Failure
8 - Overall Economic Activity
9 - AD and AS
10 - Macroeconomic Objectives
11 - Macroeconomic Objectives
12 - Demand-side and Supply-side Policies
13 - International Trade
14 - Exchange Rates and Balance of Payments
15 - Economic Integration
16 - Economic Development Intro
17 - Economic Development Topics
18 - Foreign Finance and Debt
19 - Consequences of Growth and Integration
Copyright:
Attribution Non-Commercial (BY-NC)
Verfügbare Formate
Als PDF, TXT herunterladen oder online auf Scribd lesen
[The whole document is available for free on Scribd - but you can support this with a purchase and get a downloadable PDF file!]
IB Economics SL Review Guide
1 - The Foundations
2 - Supply and Demand
3 - Elasticities
4 - Government Intervention
5 - Market Failure
8 - Overall Economic Activity
9 - AD and AS
10 - Macroeconomic Objectives
11 - Macroeconomic Objectives
12 - Demand-side and Supply-side Policies
13 - International Trade
14 - Exchange Rates and Balance of Payments
15 - Economic Integration
16 - Economic Development Intro
17 - Economic Development Topics
18 - Foreign Finance and Debt
19 - Consequences of Growth and Integration
Copyright:
Attribution Non-Commercial (BY-NC)
Verfügbare Formate
Als PDF, TXT herunterladen oder online auf Scribd lesen
EXCHANGE RATES Constant fow of money in/out of countries because residents have transactions. Intl transactions use diferent currencies (foreign exchange). Demand for foreign currencies generates supply of domestic currency (and vice versa). Exchange rates relate value of one currency to another. In a freely foating exchange rate system (abbreviated in this guide as FFERS), the market determines the exchange rates. In a diagram, the price is expressed in terms of the other currency. CHANGES IN EXCHANGE RATES Appreciation - increase in the value of a currency in a FFERS. From diagram above: increase in demand for $ or decrease in supply of $ Depreciation - decrease in value of a currency in a FFERS. From diagram above: decrease in demand for $ or increase in supply of $ 1 EXCHANGE RATES & THE BALANCE OF PAYMENTS ECONOMICS SL EXCHANGE RATES & BALANCE OF PAYMENTS CAUSES OF EXCHANGE RATE CHANGES* Increase in demand for a countrys export: appreciation Increase in countrys demand for imports: depreciation A countrys interest rate and currency value changes in the same direction Higher infation in a country relative to other countries: depreciation Increase in foreign investment: appreciation A countrys relative income level and currency value change in opposite directions Widespread expectation of appreciation will contribute to appreciation Expectations of depreciation will contribute to depreciation If the central bank buys a foreign currency: depreciation because it supplies domestic currency If the central bank sells a foreign currency: appreciation because it demands foreign currency CETERIS PARIBUS EXCHANGE RATE EVALUATIONS Infation Cost-push: A depreciation makes imports more expensive. Production costs increases which can shift the LRAS leftwards. The more inelastic the demand of the input, the greater the infation. Currency appreciation lowers infationary pressures. Demand-pull: A depreciation makes exports cheaper, increasing net exports (XM). Whether there is an infation will depend on where the economy is in the business cycle. Employment Depreciation can increase AD which can decrease cyclical unemployment and cause a temp. decrease in natural unemployment, but with infationary pressures. Appreciation will create a recessionary gap and cause cyclical unemployment or increase it. Economic growth Depreciation: Cause AD increase (short-term beneft) but with infation. Can cause increases in potential output Appreciation: Dampens GDP growth but may have indirect growth by making imports cheaper. Current account balance Depreciation: Cause imports to fall and increases exports. Can cause trade defcit to shrink. Appreciation: Increases trade defcit. Foreign debt Depreciation: causes foreign currency debt value to increase A problem faced by developing country because as their currency depreciates, they have a larger debt burden. 14.2 Government intervention FIXED EXCHANGED RATE Fixed exchange rate system - exchange rates are fxed by the central bank and does not respond to supply/demand changes. Govt intervention is used to maintain this fxed rate. 2 EXCHANGE RATES & THE BALANCE OF PAYMENTS METHODS TO MAINTAIN FIXED RATES Ofcial reserves If there is an excess supply of a currency, the central bank can sell foreign reserves to buy the excess. If there is an excess demand, the central bank can buy foreign currency. If there is an excess supply and a downward pressure, the central bank will no longer be able to sell reserves. When there is upward pressure, the central bank can just sell domestic currency. Interest rates By increasing interest rates, it will attract investments and increase the demand for the domestic currency. It may involve contractionary policy, though. Borrowing from abroad Loans will be converted into the domestic currency which will increase the demand, but there are borrowing costs. Eforts to limit imports Limiting imports can reduce supply of domestic currency. This may cause retaliation. Exchange controls Exchange controls - restrictions imposed on the government on the quantity of foreign exchange that can be bought by domestic residents. Restricts outfows of funds. Resource allocation. FIXED EXCHANGED RATE CHANGING Devaluation - when the government changes the fxed rate to a lower value because it is too high to be maintained through intervention. Revaluation - when the government fxes a currency at a higher value MANAGED EXCHANGE RATES Managed exchange rates (managed foat) combines both foating and fxed exchange rate systems, though it leans towards the foat side. Exchange rates usually foat to their market levels, but central banks intervene to stabilize them from fuctuations. Some developing nations peg their currency to the US dollar to foat with it. Pegged currencies are fxed in relation to a currency and foat in relation to other currencies. This helps price stability for many developing nations. CONSEQUENCES Overvalued currency - currency with value higher than equilibrium market value Imports become cheaper - often wanted to speed up industrialization Exports become more expensive - afects domestic exporters and worsens current account balance. Domestic producers have to compete with low-priced imports Undervalued currency - currency with low value relative to free market value Exports less expensive - used to expand exports Imports more expensive 3 EXCHANGE RATES & THE BALANCE OF PAYMENTS Undervalued currencies are considered unfair and are referred as a dirty foat. 14.4 The balance of payments BALANCE OF PAYMENTS The balance of payments is a record of all transactions between the residents of a country and the residents of other countries. Credits - payments for other countries; debits - payments to other countries; defcit - more debits than credits (negative balance); surplus - more credits than debits (positive balance) Credits create a foreign demand of a countrys currency, and debits create a supply of the currency. The IB follows a certain format for the balance of payments: Current Account Current Account Current Account 1 Exports of goods Balance of trade in goods - subtract imports from exports. 2 Imports of goods Balance of trade in goods - subtract imports from exports. Balance of trade in goods (1+2) Balance of trade in goods (1+2) Balance of trade in goods - subtract imports from exports. 3 Exports of services Same as above, but with services. 4 Imports of services Same as above, but with services. Balance of trade in services (3+4) Balance of trade in services (3+4) Same as above, but with services. Balance of trade in goods and services (1+2+3+4) Balance of trade in goods and services (1+2+3+4) Also called trade balance or balance of trade; value of total exports minus imports. The most important part of the current account. 5 Income Infows of interest, rents, and wages into a country minus outfows. Income fowing into a country is credit; and income fowing out of a country is debit. 6 Current transfers Infow of transfers such as gifts, foreign aid, and pensions minus outfows Balance on current account (1+2+3+4+5+6) Balance on current account (1+2+3+4+5+6) Balance on current account (1+2+3+4+5+6) Capital Account Capital Account Capital Account 7 Capital transfers Infows minus outfows of things like debt forgiveness, insurance claims, ad investment grants 8 Transactions in non-produced/fnancial assets Purchase of non-produced assets, such as mineral rights, fshing rights, airspace, etc. 4 EXCHANGE RATES & THE BALANCE OF PAYMENTS Balance on capital account (7+8) Balance on capital account (7+8) Balance on capital account (7+8) Financial Account Financial Account Financial Account 9 Direct investment Investment in physical capital undertaken by multinational corporations. (Also known as foreign direct investment) 10 Portfolio investment Financial investments (stocks and bonds). Borrowing from foreign lenders appears as credits 11 Reserve assets Foreign currency reserves that the central bank can buy/sell to afect countrys currency. Balance on fnancial account (9+10+11) Balance on fnancial account (9+10+11) Balance on fnancial account (9+10+11) 12 Errors and omissions Transactions are hard to record precisely. Since credits should equal debits, the error and omissions balances it out. Balance (1+...+12) Balance (1+...+12) Balance (1+...+12) The sum of everything is zero; the credits balance the debits. current account + (capital account + fnancial account + errors/omissions) = 0 CURRENT ACCOUNT AND FINANCIAL ACCOUNT If imports > exports, there is a defcit in the trade balance, which makes it likely for there to be a current account defcit. If there is a current account defcit, there is a fnancial account surplus, which provides it with the exchange needed to pay for the excess imports. A current account surplus means a country consumes less, the country has more foreign exchange that is used to buy assets and other stuf which results in a fnancial account defcit. IMBALANCE A balance of payments defcit/surplus means there is a defcit/surplus in the combined balance of payments excluding central bank intervention. In a defcit, the central bank can buy up excess currency to balance the payments. 14.5 The balance of payments and exchange rates BALANCING DEFICITS WITH SURPLUSES (FREELY FLOATING) If there is a defcit/surplus in the current account, market forces create a/n downward/upward pressure on the exchange rate. The exchange rates automatically create a balance. BALANCING DEFICITS WITH SURPLUSES (MANAGED FLOAT) The central bank of a country buys and sells currencies to balance the balance of payments. 5 EXCHANGE RATES & THE BALANCE OF PAYMENTS BALANCING DEFICITS WITH SURPLUSES (FIXED) Policies that fx the exchange rate maintain the balance of payments. COMPARING AND CONTRASTING EXCHANGE RATE SYSTEMS Fixed exchange rates Floating exchange rates Degree of certainty for stakeholders High degree of certainty. People can plan more. International trade favored - easy to calculate exchange rates. Higher uncertainty. Stakeholders unsure of future value. Abrupt changes can cause serious problems and crises. Currency speculation destabilizing. Role of foreign currency reserves Maintain fxed exchange rate. Sell reserves if defcit. Problem when not enough reserves. Not necessary. No need for intervention. Market force does it. Ease of adjustment No easy methods. Hard to handle large shocks or large defcits. Automatic adjustment. Appreciation and depreciation eliminates surpluses and defcits. Flexibility ofered to policy-makers No fexibility. To maintain fxed rate, government needs to pursue specifc policies. Greater fexibility. Domestic policies dont have to respond to BoP problems. EVALUATION: MANAGED FLOAT Supporters: Ofers fexibility to pursue policies that the economy needs. Also allows government to prevent large fuctuations. Critics: Not good enough to deal with large fuctuations; not successful in eliminating trade imbalances; allows dirty foats 6 EXCHANGE RATES & THE BALANCE OF PAYMENTS