Macroeconomics Unit 6: Foreign Exchange Markets

Introduction

• Speaker: Jacob Reed from ReviewEcon.com
• Focus: Foreign exchange markets
• Resources: Total review booklet from ReviewEcon.com

Balance of Payments

• Definition: Accounting of transactions between countries
• Components:
  • Current Account: Includes purchases of goods and services, investment income, net transfers
  • Capital and Financial Account: Includes purchases of physical and financial assets (stocks, currency, bonds)

Accounting of Payments

• Money Inflows (Credits): Increase account balance
• Money Outflows (Debits): Decrease account balance
• Surplus: More credits than debits
• Deficit: More debits than credits
• Equilibrium: Sum of current account and capital & financial account is zero

Current Account Components

• Balance of Trade: Difference between exports and imports
  • Trade Surplus: Exports > Imports
  • Trade Deficit: Imports > Exports (common in US)

Factors Affecting Current Account

• Domestic price level increases → Decrease in current account
• Increase in foreign national income → Increase in current account
• Interest rates affect capital inflow/outflow

Exchange Rates

• Definition: Price of one currency in terms of another
  • Example: 1 USD = 20 MXN Pesos
  • Appreciation: Currency value increases
  • Depreciation: Currency value decreases

Foreign Exchange Markets

• Currency Pricing: Determined by supply and demand

US Dollar Demand & Supply

• Demand Curve: Downward sloping; lower exchange rates increase demand
• Supply Curve: Upward sloping; higher exchange rates increase supply
• Equilibrium: Intersection of demand and supply curves

Demand Shifters

• Demand for US exports, foreign national income, and price levels
• Interest rates and expected future exchange rates

Supply Shifters

• Demand for imports, domestic taste, national income, and price levels
• Impacted by monetary and fiscal policy

Examples

• Decrease in US National Income:

  • Fewer imports → Decrease in USD supply → USD appreciates
  • Decrease in demand for pesos → Peso depreciates

• Increase in US Price Level:

  • Increase in imports → Increase in USD supply
  • Decrease in exports → Decrease in USD demand
  • Result: Equilibrium quantity indeterminate

Changes in Exchange Rate Effects

• Appreciation: Imports cheaper, exports more expensive

  • Net exports decrease → Aggregate demand shifts left

• Depreciation: Exports cheaper, imports more expensive

  • Net exports increase → Aggregate demand shifts right

Conclusion

• Comprehensive understanding of foreign exchange markets is crucial
• Resources available for further study and exam preparation at ReviewEcon.com
• Encouragement to like, subscribe, and support through the total review booklet

This comprehensive summary covers the essential points of foreign exchange markets, balance of payments, exchange rates, and their impact on macroeconomic variables. The content is aligned to help prepare for exams efficiently.