2. Example:The Japanese Yen Depreciating to the US Dollar Less demand for Yen when holders of US dollars
3. 4.5 What is the Balance of Payments (BOP) Key Economic Question: How well is an economy performing in the global economy? This is determined by calculating the Balance of Payments
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5. Impact of exchange rates on trade Potential increased employment in export Industries Increase in import induced inflation
Advantages of Floating Exchange Rate SystemReduced need for currency reserves as reserve banks do not have to intervene in the currency markets to keep a fixed exchange rate. Useful instrument of macroeconomic adjustmentPartial automatic correction for a trade deficitReduced risk of currency speculation on a currency that does not match fundamentalsFreedom (autonomy) for domestic monetary policy
A measure of an economy’s international trade performanceThe balance between imports and exports (Current Account) and movements of investment funds in and out of the economy (Capital Account)These accounts must balance
Visible Trade = Record of imports and exports of goods that shows the balance of trade either a trade surplus of a trade deficit Invisible Trade = imports and exports of services that shows the invisible balance of trade either a invisible trade surplus or a deficitNet Transfers are net payments of interest, profits and dividends from investments and transfers of money. Examples:Trade in goods includes: Manufactured goods, Semi-finished Components, Energy products, Raw Materials, Consumer and capital goodsTrade in services includes: Banking and Insurance, Consultancy, Tourism, Transport and shipping Education, Cultural artsNB that both the Visible Trade and the Invisible Trade can be in deficit or surplus.
