International Trade and Exchange Rates

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International Trade and Exchange Rates

• Outline
• Balance of payments (BOP) accounting
• How open is the U.S. economy?
• Description of international trade
• Exchange rateshow are they determined?
• Exchange rates and the price of imported and
  exported goods.

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Balance of payments accounting

• BOP accounting is the recording of transactions
  between domestic and foreign economic agents.
• Any transaction that results in a receipt of
  money by domestic agents from abroad is recorded
  as a credit in the BOP accounts.
• Any transaction that entails the payment of money
  by domestic units to foreigners is recorded as a
  debit in the BOP accounts.
• The current account records foreign transactions
  involving merchandise and services.
• The capital account records foreign transactions
  involving financial assets and land.

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U.S. Balance of Payments, 1998
Current Account (in billions)
1. Merchandise exports 671.0
2. Merchandise imports -919.0
3. Trade balance (1 2) -248.0
4. Service exports 503.0
5. Service imports -446.6
6. Goods and services balance (3 4 5) -191.6
7. Net unilateral transfers -41.9
8. Current account balance (6 7) -233.5
Source Department of Commerce
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U.S. Balance of Payments, 1998
Capital Account (in billions)
9. Outflow of U.S. capital -297.8
10. Inflow of foreign capital 564.6
11. Capital account balance ( 9 10) 266.8
12.Net change in U.S. official assets abroad -33.3
TOTAL (8 11 12) 0.0
Source Department of Commerce
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An index of openness
This is a simple measure of the relative
importance of the foreign sector

• Let
• O denote the index of openness
• X is exports
• M is imports
• GDP is gross domestic product

Thus, we have
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Imports Exports as a Percent of U.S. GDP,
1969-2000
percent
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International Trade The U.S. Trade Balance
billions of dollars
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The U.S. trade deficitballooned to
271.31billion in 1999a 107billion increase
from 1998.
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In billions of current dollars
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Current Account balance of selected
industrialized nations, August 1998 to August 1999
Source The Economist
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Top Exporters in 1999
Nation Exports as percent of World Total
United States 12.4
Germany 9.6
Japan 7.5
France 5.3
Britain 4.8
Canada 4.2
Italy 4.1
Netherlands 3.6
Hong Kong 3.5
China 3.3
Source The Economist
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Exchange Rates
An exchange rate is the price of one national
currency expressed in terms of another national
currency. For example, the dollar price of the
British pound is 1.71-- meaning it takes 1.71
to buy 1 pound
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• Why do agents want to swap marks for dollars?
• To buy American-made goods.
• To hold stocks in U.S. companies or other
  dollar-denominated assets.
• To speculate on future exchange rate movements

Exchange rates are determined by the supply and
demand of foreign exchange
S
DM per
1.82
1.69
In this case, the mark depreciates against the
dollar
D
D
s
0
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Source Wall Street Journal
Currency Cross Rates New York Trading, August1,
2000
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Euro in free fall
10/11/99
2/28/00
7/17/00
Dollars per Euro
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Firms and individuals demand marks to buy
German- made goods, to hold mark-denominated finan
cial assets, or to profit from what they hope
will be an increase in the international value of
the mark.
?Dollar appreciates against the mark
S
per DM
S
.59
.55
D
DMs
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Exchange rates and the price of imported goods
Let the dollar price of the mark 0.59--i.e.,
it costs 59 cents to purchase 1 mark in the
market for foreign exchange. Let the mark price
of a Krups espresso maker 100 marks Question
What is the dollar price of the Krups espresso
maker?
price (.59)(100) 59.00
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Effect of an appreciating dollar on the price of
imported goods
What if the dollar should appreciate, or gain
value, against the mark? Let the dollar price of
the mark decrease to 0.55 . Question What is
the dollar price of the Krups espresso maker?
price (.55)(100) 55.00
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Exchange rates and the prices of exported goods
and services
Let the mark price of the dollar 1.69
marks--i.e., its cost 1.69 marks to buy a dollar
in the foreign exchange market. Let the dollar
price of the Microsoft Windows 98
189.00 Question What is the mark price of
Windows 98?
Mark price (1.69)(189.00) 319.41 marks
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Effect of a depreciating mark on the price of
Windows 98
Let the mark price of the dollar increase to 1.82
marks. Question What is the mark price of
Windows 98?
Mark price (1.82)(189.00) 343.98 marks