5. Why PPP is not perfect
unrealistic assumptions
goods are not identical
not all goods are tradable
local markets differ
different inflations
different tastes
12. Balance of Payments
Account Component + Receipts - Payments Balance
Current Merchandise Exports $400 $400
Merchandise Imports $600 -$200 Trade Balance
Net Export Service $50 -$150 Net Exports
Net Unilateral Transfers $30 -$180
Current
Account
Balance
Capital Inflows $280 $280
Outflows $100 $180
Capital
Account
Balance
Balance of
Payments
$730 $730 $0
13. Balance of Payments and
the Exchange Rate
Receipts are foreign
demand for dollars
Payments are local supply
of dollars
14. Lower U.S. Interest Rates
Lower demand for dollars
Higher supply of dollars
Higher U.S. Interest Rates
Higher demand for dollars
Lower supply of dollars