IPE WEEK 6

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IPE - WEEK 6

• International Finance
• Part I Key Terms
• Berkeley City College

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Bryan Denton for The New York Times
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BOP Accounts

• Current Account personal checking account
• Trade balance exports and imports of goods and
  services
• Investment income
• Unilateral transfers
• Current account deficit/surplus
• Capital Account
• Stocks (sold to foreign residents or bought from
  them)
• Bonds
• Real Estate
• Capital account surplus/deficit

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Balance in BOP
Current Account Capital Account 0
return to the US
in the form of a purchase of American
goods/services
in the form of a purchase of American investments
Current account deficit
Offset current account deficit
Create capital account surplus (offset)
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BOP Deficit

• BOP deficit/crisis
• A country can not borrow on its capital account
  to finance its trade deficit.
• An economic problem becomes a political one.

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Foreign Exchange Regimes

• A nations has one of the three FX regimes
• Fixed
• Flexible (floating)
• Managed
• Main principles
• Stability
• Credibility
• Flexibility

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Currency Fluctuations

• Currency values are always relative to other
  currencies.
• Time period 1 2/19/2006 US1 .84 or 1
  US1.19
• Time period 2 2/19/2007 US1 .74 or 1
  US1.31
• Analysis
• Strengthening (Appreciation) of the it can buy
  more
• Weakening (Depreciation ) of the (euro) it can
  buy less
• Changes in the value of a countrys currency
  affect its ability to
• purchase and sell goods and services across
  international boarders.
• Special case Devaluation
• Determinants of exchange rates
• Monetary Policy changes in interest rates
• Economic conditions changes in price levels
  (e.g. inflation)
• Political conditions
• Currency types Hard vs. soft currency

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International Financial Institution IMF

• International Monetary Fund
• Bretton Woods institution (1944), HQ in
  Washington DC
• Task
• Until 1970s maintain Bretton Woods FX system
• Post-Bretton Woods system supervise debt
  payments and adjustment policies
• Adjustment policy currency devaluation, low
  inflation, fiscal austerity, free trade,
  enhancement of social safety net
• Reality adjustment policy meets globalization
  financial crises, growing debt