Other economists refer to the dollar as the and the balance of payments world's "vehicle currency," which means that people wak identify the key accounts within the in other countries.
More generally, the dollar is the exchange dominant global currency that many people believe and discuss factors that can induce changes throughout the world to conduct transactions in equilibrium exchange rates relating to international trade and finance.
Understand how policymakers can go the 2000s, the dollar's position appeared to be about attempting to fix exchange rates, and some observers suggested that the euro, the currency used by a number of European nations, might replace the dollar.
Canadians traded more of their Canadian dollars for U.S. dollars because Know could be obtained with a Canadian dollar.
The amount of Canadian dollars that Canadian residents wanted to trade for U.S. dollars increased because of the value of the U.S. dollar.
The relationships between the exchange rate and desired foreign currency holdings are key elements in the determination of exchange rates.
The gross domestic product is the total of expenditures on all newly produced final domestic goods and services.
A summary information system has been developed.
The balance of trade and payments are covered.
The value of exports is equal to the value of imports.
We run a surplus when the value of exports surpasses the value of imports.
Each country's balance of payments contains information about transactions of goods, services, income, country's exports and imports of services as well as physical goods, earnings by domes and financial assets between domestic households, businesses and governments.
The balance of payments is a record of all the transactions between households, firms, and the government of one country and the rest of the world.
There is a list of the surplus and deficit items on international accounts.
The values are equivalent.
If a family unit is currently spending more than it is earning, it must draw on previously acquired wealth, borrow, or receive either private or public aid.
An identity exists for a family unit that is currently spending less than it is earning if it is increasing its money holdings, lending or acquiring other financial assets, or paying taxes or giving gifts to others.
Businesses and governments have their own identities and constraints.
Even though our individual family unit's accounts must balance, in the sense that the identity discussed previously must hold, sometimes the item that brings about the balance cannot continue indefinitely.
The family may be in disequilibrium if the deficit is financed by drawing on accumulated assets.
Eventually, the family will stop living that lifestyle.
The entire group of households, businesses, and governments must eventually reach equilibrium.
Economic adjustment mechanisms have evolved.
Deficit households have to eventually increase their income or decrease their expenditures.
If they want to borrow to finance their deficits, they will have to pay higher interest rates.
They will be forced into equilibrium when their credit sources dry up.
Businesses sometimes have to lower costs or go bankrupt to reach equilibrium.
The identities of people from different nations must hold.
People buy goods in other countries.
They give gifts to people in other nations.
An accounting identity ensures a balance if residents of a nation interact with residents of other nations.
There are three categories of balance of payments transactions: current account transactions, capital account transactions, and official reserve account transactions.
Balance of payments, exchange of services, and unilateral transfers are some of the major types of current account transactions.
The largest portion of a nation's balance of payments is used to import and export goods.
The United States exported an estimated $1,222.6 billion of goods and imported $1,824.8 billion in 2011.
The difference between the value of exports and imports is known as the balance of trade.
The United States had a balance of merchandise trade deficit in 2011.
The deficit was over $600 billion.
There are tangible items that you can feel, touch, and see.
invisible or intangible items that are bought and sold include shipping, insurance, tourist expenditures, and banking services.
Service imports and exports include income earned by foreign residents on U.S. investments.
In the year of 2011, the estimated service exports were $524.8 billion and the service imports were $387.3 billion.
The balance of services was $137 billion in 2011.
Inflows into the United States are positive when exports are included.
Payments abroad or outflows of money are negative.
The balance of goods and services is equal to $464.7 billion in 2011.
A statistical discrepancy and uncounted capital inflows relate to the illegal drug trade.
The federal government makes grants to foreign nations, foreign residents give gifts to U.S. residents, and some foreign governments grant funds to the U.S. government.
The total amount of gifts given by U.S. residents and the government came to an estimated -$148.2 billion in 2011.
The minus sign indicates that the U.S. residents and the U.S. government gave more to foreign residents.
The value of a country's exports of goods and services and private and government transfers are tracked on the current account.
It was estimated to be over $600 billion in 2011.
The export of financial assets is needed to pay for the deficit.
Capital account transactions occur because of foreign investments, either by foreign transactions that measures flows of financial residents investing in the United States or by U.S. residents investing in other coun assets.
An outflow of funds from the United States to Britain is caused by the purchase of stock in British firms by a U.S. resident.
The construction of a Japanese automobile factory in the United States causes an inflow of funds from Japan to the United States.
There is an inflow of funds from other countries when foreign residents buy U.S. government securities.
There is an outflow of funds from the United States to other countries when U.S. residents buy foreign government securities.
Loans to foreign residents cause outflows.
The value of private capital going out of the United States was estimated at over a billion dollars, and line 11 shows the value of private capital coming into the United States.
U.S. capital going abroad is negative.
Foreign capital coming into the United States is positive.
There was a positive net capital movement into the United States.
The balance on capital account is the net private flow of capital.
Assuming no interventions by the finance ministries or central banks of nations, there is a relationship between the current account balance and the capital account balance.
The current account balance and capital account balance must be zero in the absence of interventions by finance ministries or central banks.
The current account deficit must be equal to the capital account surplus when governments or central banks do not intervene in foreign exchange markets.
The United States must be running a capital account surplus if it is experiencing a current account deficit.
Since the early 1980s, the U.S. current account has mostly been balanced by private capital inflow, but there are exceptions.
The sum of the capital was negative in the current account balance.
The current account balance was in deficit when the official transactions balance was also in deficit.
The official transactions balance was positive and we can see this in the current account balance.
To consider how official reserve account transactions occur, look again at Table 33-2 international foreign exchange system.
The US capital account had a surplus.
The United States had a net payments problem because of the balance of deficit in the U.S. current account.
The combined accounts have a national deficit of $300.1 billion and the International Monetary Fund is the lender of last resort.
The United States got less foreign funds in international transactions than it used.
By foreign central banks and governments adding to their U.S. funds, shown by the $300.1 billion in official transactions on line 14.
The official transactions figure is used to calculate the U.S. balance of payments deficit.
The balance is zero in Table 33-2 as it must be with double-entry bookkeeping.
The rate of inflation relative to that of its trading partners is a major factor affecting the distribution of account balances.
The rates of inflation in the United States and the European Monetary Union are the same.
Imagine that the U.S. inflation rate increases suddenly.
EMU residents will find that U.S. products are becoming more expensive.
The current dollar-euro exchange rate will cause U.S. residents to import more EMU products.
If the U.S. inflation rate falls relative to the EMU, the reverse will occur.
When the U.S. rate of inflation exceeds that of its trading partners, we expect to see a larger deficit in the U.S. balance of merchandise trade.
When the U.S. rate of inflation is less than that of its trading partners, we expect to see a smaller deficit in the U.S. current account balance.
Political stability is one of the factors that can affect account balances within a nation's balance of payments.
Political stability in the United States is one of the reasons why owners of capital in countries that are experiencing political instability will move their assets there.
Whenever political instability looms in other nations in the world, the U.S. capital account balance is likely to increase.
The answers can be found on page 748.
The value of all transfers and net investment income is reflected in the __________ of __________.
The difference between buying and selling financial assets is given by the merchandise trade balance.
Along with the account, there is a merchan account.
Income earned by foreign residents on the U.S. is included in the assets of individual countries.
By investments and income earned by U.S. residents, official transactions are investments.
Federal government grants or gifts to foreign nations are involved.
Account balances within a nation's balance of payments can be affected by two factors.
You can pay the European manufacturer with dollars when you buy foreign products.
Workers can't be paid in dollars by the European manufacturer.
The euro is the currency of the European Monetary Union and the workers have to use it to buy goods and services in nations that are members of the EMU.
The market in which households, firms, and facturer will accept.
The foreign exchange rate is determined by the demand for and supply of euros in the foreign exchange market.
A person going to the foreign exchange market in Europe would need about 0.83 euro to buy 1 dollar.
What determines the demand for and supply of foreign currency in the foreign exchange market?
Europe and the United States are the only two regions in the world.
European-produced pharmaceuticals can be purchased directly from a manufacturer.
You need euros to do that.
You go to the foreign exchange market.
Supply dollars are offered to the foreign exchange market when you want to buy pharmaceuticals.
Your supply of dollars to the foreign exchange market is equivalent to your demand for euros.
Every U.S. transaction involving the import of foreign goods constitutes a supply of dollars and a demand for foreign currency, and the opposite is true for export transactions.
The import transaction is a demand for euros.
European pharmaceuticals and U.S. computer printers are the only goods being traded.
There is a demand for dollars in the foreign exchange market due to the U.S. demand for European pharmaceuticals.
The European demand for U.S. computer printers creates a demand for dollars in the foreign exchange market.
Exchange rates that are allowed to fluctuate equilibrium exchange rate will tell us how many euros a dollar can be exchanged for in the open market in response to changes in the euro price of dollars.
To determine the equilibrium foreign exchange rate, we have to find out what deters recent mines from demand for and supply of foreign exchange.
We will ignore the data from the Federal Reserve Bank of St.
We assume that Louis is the exchange value of the U.S. dollar relative to the major currencies of the world.
The idea of paying a certain price for something is similar to the idea of an exchange rate.
You will have to pay about $1.50 for a cup of coffee.
You will probably buy less cups if the price goes up.
You will likely buy more if the price goes down to 50 cents.
The demand curve for cups of coffee, expressed in dollars, slopes downward following the law of demand.
We will see why the demand curve for euros slopes downward.
Let's take a closer look at the demand schedule for euros.
If it costs $1.10 to purchase 1 euro, that's the exchange rate.
The exchange rate would change if you had to pay $1.25 for the same euro tomorrow.
A decrease in the exchange value will make you demand less.
The reason for the nation's currency in terms of the currency of ers demand euros in the first place is the answer.
In our example, you and others demand euros to buy European pharmaceuticals.
The law of demand leads to the slope of the demand curve for European pharmaceuticals.
You and other U.S. residents will not buy the same quantity of European pharmaceuticals if it costs more.
The quantity demanded will be less.
The United States is expressed in dollars per package of pharmaceuticals.
We can see the derived demand for euros in the United States in order to purchase the various quantities of pharmaceuticals given in ice per Euro ($) panel.
There is a panel with 1, shown in it.
U.S. demand for euros was derived.
A demand schedule for packages of European pharmaceuticals by a representative set of U.S. consumers during a typical week.
The price of a package of European pharmaceuticals is 100 euros.
The number of euros required to purchase 500 packages of European pharmaceuticals is given by the price.
Purchasing 500 packages of European pharmaceuticals requires 50,000 euros.
We have enough information to figure out the demand curve for euros.
A package of pharmaceuticals would cost 120 euro per package if the price of 1 euro was $1.20 per euro.
50,000 euros would be demanded to buy 500 packages of pharmaceuticals.
The quantity demanded is shown in panel d. The demand curve for euros is drawn in panel (e).
If the price of euros goes up, what will happen?
The package of European pharmaceuticals would now cost $125.
300 packages of pharmaceuticals will be imported from Europe into the United States by our group of U.S. consumers at $125 per package.
300 packages of pharmaceuticals would require 30,000 euros to be purchased.
At a price of $1.25 per euro, the quantity demanded will be 30,000 euros.
We continue our calculations all the way up to a price of $1.30 per euro.
The representative U.S. consumers would import 100 packages of pharmaceuticals from Europe at that price.
As the price of the euro goes up, the quantity demanded will go down.
The demand for euros is derived from the demand for a final product in our example, which is the same as the standard demand analysis developed in Chapter 3.
European pharmaceutical manufacturers buy U.S. drugs.
The supply of euros is derived from the European demand for U.S. computer printers.
To come up with a supply schedule of euros in Europe, we could use an example like the one for pharmaceuticals.
Europeans want dollars to purchase U.S. goods.
European residents will be willing to give more euros when the dollar price of euros goes up, because they will be able to buy more U.S. goods with the same amount of euros.
The euro would be worth more in exchange for U.S. goods when the dollar price was lower.
Let's use an example.
A computer printer made in the U.S. costs $200.
A European resident will have to pay about $200 for a computer printer if the exchange rate is less than $1.20 per euro.
If the exchange rate goes up to $1.25 per euro, a European resident needs to come up with only 160 euros to buy a U.S. visa.
Europeans will demand a larger quantity at the lower price of U.S. computer printers.
As the price of euros goes up, the quantity of U.S. computer printers demanded will go up.
If the market price of a U.S.-produced computer printer is $200, then at an exchange rate of $1.20 per euro, the price of the printer to a European consumer is 167.67 euros.
The price of the printer in Europe will go down if the exchange rate goes up.
The European price of the printer goes up if the exchange rate goes down.
European consumers demand a decrease in the number of printers.
The euro supply curve slopes up.
Let's look at the total demand for and supply of euros.
We put the demands of both European and U.S. consumers into one diagram.
We are showing the total demand for and total supply of euros.
The exchange rate is expressed in dollars per euro.
It will cost you $1.25 to buy 1 euro in the foreign currency market.
It will cost you $1.20 to buy 1 euro at the foreign currency price.
The equilibrium exchange rate will be set at $1.20 per euro if there are only representative groups of pharmaceutical consumers in the United States and computer printer consumers in Europe.
This equilibrium isn't established because U.S. residents buy dollars or euros.
The foreign exchange price is shown on the vertical axis.
The horizontal axis shows the number of euros.
The exchange rate is $1.20 per euro.
Billions of Euros per Year ceuticals U.S. residents want, given their respective incomes, their tastes, and, in our example, the relative prices of pharmaceuticals and computer printers.
A successful advertising campaign by the U.S. pharma has caused U.S. demand for European pharmaceuticals to increase.
European pharmaceuticals have shifted their demand curve to the right.
The original demand schedule is to the right of this demand schedule.
The supply schedule for euros will remain stable if Europeans don't change their mind about U.S. computer printers.
A new equilibrium will be established.
The new equilibrium is established at an exchange rate of $1.25 per euro.
It used to take $1.20 to buy 1 euro.
The price of European pharmaceuticals will go up and the price of U.S. computer printers will go down.
A package of European pharmaceuticals that was priced at 100 euros in the United States will now be priced at $125.
A U.S. printer that was priced at $200 will now sell for 160 euros.
A decrease in the dollar's exchange value has not yielded dramatic residents because of the interaction of supply and demand.
Economists study the world's currencies.
The U.S. dollar's value would have to decline by nations, which discouraged foreign purchases, in order for the U.S. goods and exchange markets to double.
The demand schedule for European pharmaceuticals shifts to the right, causing the derived demand schedule for euros to shift to the right as well.
European demand for U.S. dollars has remained stable in the supply schedule for euros.
The E2 exchange rate was $1.20 per euro.
The price of 1 euro will now be $1.25.
The supply curve for euros has changed.
The euro will now be bought for 1 euro.
The amount of euros demanded and supplied will increase after the exchange rate is adjusted.
We assumed that the U.S. demand for European pharmaceuticals shifted because of a successful ad campaign.
U.S. residents demand for pharmaceuticals leads to the demand for euros.
The demand curve for euros is affected by the change in pharmaceuticals demand.
The supply curve of euros might shift to the right as an alternative exercise.
One of the reasons for a supply shift could be a rise in the European price level.
If the prices of European-made computer peripherals went up 20 percent in euros, the U.S. computer printers would become cheaper.
Europeans would want to buy more U.S. computer printers.
They want to buy more U.S.
In a system of flexible exchange rates, the new equilibrium exchange rate will be $1.15 equals 1 euro.
The amount of euros demanded and supplied will increase.
In a flexible international exchange rate system, shifts in the demand for and supply of foreign currencies will cause changes in the equilibrium foreign exchange rates.
The rates will remain in effect until there is a change in world supply or demand.
Suppose that the U.S. interest rate increases relative to the rest of the world.
International investors looking for higher returns in the United States will increase their demand for dollar denominated assets, thereby increasing the demand for dollars in foreign exchange markets.
Increased demand for dollars in foreign exchange markets will cause the dollar to appreciate and other currencies to depreciate.
If Germany's citizens start liking U.S.-made automobiles, this will increase the demand for U.S. dollars in foreign exchange markets.
If the United States is more stable than other countries, more foreign residents will want to put their savings in U.S. assets.
The demand for dollars will increase.
There is a positive relationship between appreciations.
The currencies of nations with current account nations' current account balances and percentage changes in the values of deficits tend to depreciate.
The answers can be found on page 748.
One country's currency can be exchanged for another's.
Goods and services will result from the demand for foreign goods.
Foreign residents changing the equilibrium foreign exchange rate leads to a shift in the foreign exchange rate.
The current system of exchange rates is relatively recent.
We have had periods of a gold standard, fixed exchange rates under the International Monetary Fund, and variations of the two.
Many nations were on a gold standard until the 1930s.
Nations operating under this gold standard agreed to redeem their currencies for a fixed amount of gold at the request of their holders.
The unit to which all currency was pegged under the gold standard was not the means of exchange for world trade.
Exchange rates between the currencies were fixed because they were pegged to gold.
There were two problems with the gold standard.
By fixing the value of its currency in relation to the amount of gold, a nation gave up control of its domestic monetary policy.
The world's commerce was affected by gold discoveries.
Domestic expenditures on goods and services increased when new veins of gold were found.
Inflation was caused if the production of goods and services did not increase proportionately.
After World War II ended, representatives from the world's capitalist countries met in New Hampshire to create a new international payment system to replace the gold standard.
The Act was signed by President Harry Truman.
The International Monetary Fund was created.
The International Monetary Fund was tasked with administering the agreement and to lend to member countries for which the sum of the current account balance and capital account balance was negative.
The old International Monetary Fund system or theBretton Woods system is what the arrangements are now called.
The value is officially determined.
Only the approval of the International Monetary Fund could members alter exchange rates after a one-time adjustment of up to 10 percent in par value.