Zusammenfassung der Ressource
Open Economy and Exchange
Rates
- International Exchange
Anmerkungen:
- countries trade with one another to obtain goods and services that they cannot produce or to take advantage of the fact that other countries can produce themselves at lower cost than they can (comparative advantage)
- Exchange Rates
Anmerkungen:
- The price of one countries currency e,g, Japanese yen or NZ$ dollar, in terms of another country's currency.
e.g. in japanese yen, the price of the surf board costs 20,000円 and the exchange rate in NZ$ dollar is 87.9円
thefore we use the formula e/p
will be 20,000/87.9 = 227.5 in NZ$
- Foreign Exchange rate
Anmerkungen:
- All currencies other than domestic currency of a given country or when one country's currency can be exchanged for another
- Demand for NZ doallr
Anmerkungen:
-
The demand curve for dollars represents the demand by foreigners for NZ currency.
The demand curve is downward sloping.
If E↑, the dollar is more expensive
to foreigners so they buy fewer dollars. The demand curve for dollars shifts
right (increase in demand ) when foreigners want to: - Buy more NZ exports (goods and
services) increse in EX or export - Invest more in New Zealand (by
buying New Zealand assets) increase in I (investment)
- Supply of NZ dollars
Anmerkungen:
- NZ citizens’ supply of dollars to buy foreign goods and investments
The supply curve is upward sloping.
If E↑, foreign currency and foreign goods are cheaper, so NZ residents supply a greater quantity of dollars. The supply curve of dollars shifts when
NZ residents wish to:- Buy more imported goods- Invest more in foreign countries
- Currency Depreciation
Anmerkungen:
- it is a loss of value of a country's currency with respect to one or more foreign reference.
if exchange rate of NZ$ decreases therefore it has depreciation . this can be determined by the fluctuation (it changes either increase or decrease) of the exchange.
- Currency Appreciation
Anmerkungen:
- sometimes exchange rates tend to increase or unofficial increase of the exchange rate and this is due to the market forces and this shifts the Exchange rate to increase which shifts the supply curve due to the increase in cost.
- Balance of payment
Anmerkungen:
- the record of country's transactions in goods, services, and assets with the rest of the world; also record of a country's sources (supply) and use demand of foreign exchange
it is divided into two accounts
- current account
- capital account
- The current Account
Anmerkungen:
- Net exports of goods (Export - imports) + net exports of services (Export of service - Import of service) + net investment income + net transfer payment = the balance on current account
- it shows how much nation has spent on foreign goods, services, investment income payments and transfers relative to how much it has earned from other countries.
- Balance of trade
Anmerkungen:
- the difference between a country;s exports of goods and services and imports of goods and services
- Trade Deficit
Anmerkungen:
- it occurs when a country's exports of goods and services are LESS than its imports of goods and services (X<M)
- The Capital Account
Anmerkungen:
- the capital of account of the balance of payments records the changes in these assets and liabilities.
- Domestic Price
Anmerkungen:
-
•domestic currency per unit of foreign currency e.g. NZ$1.11 per AU$1.00
- it is determined by Exports and Imports
- Equilibrium exchange rates
Anmerkungen:
- equilibrium exchange rate occurs at the point at which the quantity demanded of a foreign currency equals the quantity of that currency supplied.
- Shifts in Demand of any currency's in the foreign exchange
market
Anmerkungen:
- the higher price level in one country will cause the other countrie's import to be relatively less expensive. therefore first country will increase spending on imports, shifting the second countries demand to the right. at the same, second country will find first country's goods to be more expensive causing the supply to shifts to the left therefore it appreciates
- Floating exchange rate
- Fixed vs floating exchange rate
Anmerkungen:
-
Advantages of fixed exchange rates
- certainty
- prevents 'irresponsible' government policies
Disadvantages of fixed exchange rates - exchange rate policy may conflict with other macro objectives - danger of using deflation to manipulate trade (which risks retaliation by the trade partner) - problems of international liquidity - inability to adjust to shocks
speculation
- Speculation
Anmerkungen:
- The choice to buy an asset today depends on beliefs of the future value of the asset. For internationally traded assets, it also depends on the expected exchange rate.
Speculators trade currency to take advantage of potential changes in future exchange rates.
E.g. If $1 buys 100 yen today but only buys 50 yen in one year, the yen appreciates against the dollar.
- Advantage
Anmerkungen:
- •Automatic correction
•No problem of international liquidity and reserves
•Insulation from external economic events
- Governments are freer to choose domestic policy
- Disadvantage
- Open Economy
Anmerkungen:
- aggregate expenditure in an open economy : AE = C + I+ EX - IM
AE = aggregate expenditure
C = consumption behavior of households
I = investment behavior of firms
G = government spending
EX = net exports of goods and services
- net exports of goods and services
Anmerkungen:
- (EX - IM)
the difference between a country's total exports and total imports
- What determines the level of imports?
Anmerkungen:
- IM = mY
when individual's income rises, imports tend to increase also.
Y = income
m = positive number (m is assumed to less than $1; otherwise, a $1 increase in income generate s an increase in imports more than $1, which is unrealistic)
- Marginal propensity to import (MPM)
Anmerkungen:
- the change in imports caused by a $1 change in income.
- import and export prices and Price feedback effect
- price feed back effect
Anmerkungen:
- the process by which a domestic price increase in one country can "feed back" on itself through exports and import prices. an increase in the price level in one country can drive up prices in other countries. this is in turn turn further increases the price level in the first country
- Floating or market -determined exchange rates
Anmerkungen:
- exchange rate that are determined by the unregulated forces of supply and demand. government will still intervene to ensure exchange rate movements are "orderly"
- purchasing power Parity : PPP
Anmerkungen:
- A theory of international exchange holding that exchange rates are set so that the price of similar goods in different countries is the same therefore it is the balance on goods and services in other different countrry