Sections 4.5 and 4.6
Section 4.5: Balance of Payments
Balance of Payments = Current Account + Capital Account
Current Account = Visible Trade (Imports and Exports of Goods) + Invisible Trade (Imports and Exports of Services) + Net Transfers
Capital Account = Net Transfers of Capital + Net Investment and Loans + Changes in National Reserves
Section 4.6: Exchange Rates
3 systems: Fixed, Floating (Flexible), and Managed
Fixed Exchange Rate System: Government intervention to maintain a fixed exchange rate
Floating (Flexible) Exchange Rate System: Supply and Demand determine the exchange rate
Managed Exchange Rate System: Exchange rate generally allowed to float but government intervene to avoid sudden fluctuations
Increase in Demand + Decrease in Supply = Currency Appreciation
Decrease in Demand + Increase in Supply = Currency Depreciation
6 factors that influence exchange rates: Interest Rates, Changes in Income, Changes in Preferences, Relative Rates of Inflation, Speculation, and Foreign Currency Reserves.
Currency Appreciation = Exports more expensive for overseas buyers + Imports cheaper for domestic buyers
Currency Depreciation = Exports cheaper for overseas buyers + Imports more expensive for domestic buyers
USA Current Account:
Prior to the global economic crisis, the US dollar was strong, which meant that they were importing more than they were exporting. As a result, they developed a current account deficit, which kept on building up year after year until recently. Now that the US dollar is weak, they are importing less than they are exporting, which means their current account deficit is slowly contracting.
This is a sound analysis on the current balance of payment of the United States. I like your graph which gives the deficit in terms of the country’s Gross Domestic Product.