Beruflich Dokumente
Kultur Dokumente
Automatic adjustment
Remarks
Balance of payments
1. Trade account (trade) TA 2. Current account (capital) CA
Equilibrium (TA+CA=0) & full equilibrium (TA=0, CA=0) Transactions between residents and non residents Values (domestic currency, thus it depends on quantities, prices and the exchange rate)
Trade account
IMPORTS
1. 2. 3. 4. Domestic price Foreign prices Real exchange rate = p e / pf (PPP) Exchange rate Income (Keynesian [Q]) Domestic price Foreign prices Real exchange rate Exchange rate Foreign income ( foreign income) (Keynesian [Q])
EXPORTS
1. 2. 3. 4.
pe er = pf
If it increases, competitiveness falls. e is how many euro you need to buy a dollar,
Capital account
Capital inflows
1. Domestic nominal interest rate (UIP) 2. Forward premium (spotforward) (CIP) i.e. the foreign currency tomorrow has an higher value than today.
Capital outflows
1. Foreign nominal interest rate 2. Forward premium
Automatic adjustments
Three cases 1. Price with fixed exchange (p and pf) 2. Price with flexible exchange (e) 3. Quantity (income y and foreign income yf)
In the fixed exchange rate regime the story is more or less the same
Quantitative theory of money: YN = v M or YR P = v M. The velocity of money is constant. The real income is constant (i.e. competitive markets). Thus (YR and v are fixed: v M = YR P): M P
TA>0 TA+CA=0
However notice that CA+TA=0 but CA<0 and TA>0, i.e. it is not a full equilibrium. Indeed it is more complex.
Summary
Deficit or surplus of the balance of payments are adjusted by changes in the level of price, which stimulates the domestic or foreign trade. Changes occurs until the balance of payments get the equilibrium. Since a disequilibrium of it stimulates further changes. Basic mechanism: Competitiveness that depends on prices and exchange rate, which is here fixed..
The mechanism
Deficit of the balance of payments. Excess of demand of the foreign currency. Domestic currency depreciation (if the market is stable, i.e. supply slope larger than the demand one). More competitiveness Reduction of the deficit until balance
qE PUS qI PF/R = BP
qE quantity exported; PUS US price; qI quantity imported; PF Foreign price; R exchange rate (direct quotation: # of foreign currency units needed to buy one dollar.
Summary
Deficit or surplus of the balance of payments are adjusted by changes in the exchange rate, which stimulates the domestic or foreign trade. Changes occurs until the balance of payments get the equilibrium. Since a disequilibrium of it stimulates further changes. Basic mechanism: Competitiveness depends on exchange rate and deficit (surplus) stimulates deprecation (appreciation) if the ML condition holds.
A two-country world
Country A Deficit Income Imports Exports Deficit falls Country B Surplus Income Imports Exports Surplus falls
Notice that country A exports = country B imports and vice versa. Thus:
Differences
Price mechanisms are slow but at the end lead to the equilibrium; BP=0. Quantity (Income) mechanism is fast but it leads only in the direction of the equilibrium of the BP. In the real world but works together.