Balance of Payments

Inflow = credits
Outflow = debits

Balance of payment divided:
1. Current Account
2. Capital Account
3. Official Reserves Account

Current Account:
Balance of Trade of Net Exports
             - Exports = credit to balance
              -Imports = debit to balance

Net Foreign Income
Net Transfers (tend to be unilateral)
               -Foreign Aid = debit to current account


Capital Account:
Balance of capital ownership
Includes the purchase of both real and financial assets
Direct investments in the US is a credit to the capital account
Direct investment by US firms/individuals in a foreign country are debits to the capital account
Purchase of foreign financial assets represents a debit to the capital account
Purchase of domestic financial assets by foreigners represents a credit to the capital account.
             
         *Current Account and Capital account should zero each other out.*

Official Reserves

foreign currency holdings of the US Federal Reserve System

Balance of payments surplus = Fed accumulates foreign currency

BOP payments = Fed depletes its reserves of foreign currency

Foreign Exchange

Foreign exchange 

• the buying and selling of currency 
• Any transaction that occurs in the balance of payments necessitates foreign exchange 
• The exchange rate (e) is determined in the foreign currency markets - [ex. the current exchange rate is approximately 8 yuan to 1 dollar] 

Changes is exchange rates 

• an increase in the supply of currency will decrease the exchange rate of a currency 
• A decrease in supply of a currency will increase the exchange rate of a currency 
• An increase in demand for a currency will increase the exchange rate of a currency 
• A decrease in demand for a currency will decrease the exchange rate of a currency 

Appreciation and depreciation 

• appreciation of a currency occurs when the exchange rate of that currency increases (e⬆️) 
• Depreciation of a currency occurs when the exchange rate of that currency decreases (e⬇️) 

Exchange rate determinants 

1. Consumer tastes 
2. Relative income 
3. Relative price level 
4. Speculation 

Exports and imports 

• the exchange rate is a determinant of both exports and imports 
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper this reducing exports and increasing imports 
• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports

World Currency Symbols

Unit 5 & 6 Notes

Short Run Effects
short run: price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant
long run: wages will adjust to the price level &previous output levels will adjust accordingly

Equilibrium in the extended model
the long as curve is represented with a vertical line @ full employment level of real GDP

Demand pull inflation in the AS model
Demand pull prices increase based on increase in aggregate demand
In the short run demand pull will drive up prices and increase production
In the long run, increases in aggregate demand will eventually return to previous levels


Dilemma for the government
In an effort to fight cost push the government can react in two different ways
Action such as spending by the gov. Could begin an inflationary spiral
No action however could lead to recession by keeping production and employment levels declining




Long run Phillips curve

- No trade off between inflation and unemployment at LRPC
- Always vertical at the natural rate of unemployment
- Only shift if LRAS shifts

The major LRPC assumption is that more worker benefits creat higher natural rates and fewer worker benefits creates lower natural rates

SRPC

- *see short run*


Supply shocks

- Rapid and significant increases in resource cost which causes the SRAS curve to shift
- SRAS is going to decrease
- SRPC is going to shift outward (increasing)

Misery index

- Combination of inflation and unemployment in any given year
- Single digit misery is good



Vocab to Know
Inflation: General rate in the price level.

Deflation:General decline in price level.

Disinflation:Reduction in the inflation rate from year to year.

Stagflation: unemployment and inflation increase at the same time.


Changes in AS but not AD
Determines the level of inflation, unemployment rates, and economic growth.
Supply Side economists support policies that promote GDP growth that arguing that high marginal tax rates along with the current system of transfer payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.