Untitled

Lecture 2 06.09.2018.

Balance of trade

=Exports minus Imports

Trade surplus= Bal of Trade >0

Common misinterpretations

Deficit= we are losing money--> misconception

Earlier kind of true-> money was gold, there was no inter capital flow, imports>exports meant you were spending more than earning

Today there are capital flows

a country with imports> exports can Borrow and sell assets to foreigners 

Definit= we are losing jobs --> misconception

Scott; connection exports= gained jobs, Import=jobs lost. 

--> he assumes that imports replace domestic production--> sometimes true... but mostly not. 

 

Griswold: US economy has done best when the trade deficit was growing--> misconception

--> High incomes led to higher imports... not the cause of the trade deficit!!!!

Deficit means other countries are misbehaving--> misconception

--> things affecting; competitive  advantage (China), currencies 

 

Germany example--> german growing domestic demand through other countries trade deficit--> not necessarily, can be an effect on development that German goods are demanded. 

 

International transactions are divided into two parts:

Current Account and Financial Account. 

---> Remember that balance is needed. 

 

Current account: Trade in goods, services, investment income and unlater transfers (gifts, foreign aid).

FInancial account: Includes only changes in asset holdings 

-Balance part of the current account! Remember. 

Indicators of crisis, 5:

1.Current account deficit, EU scoreboard of macroeconomic imbalances-toolkit. Note Maastricht indicators: 3% deficit/GDP, 60% debt/GDP

2.

3.

4.

 

Current account deficit concern of Donald Trump--> mainly looking into the deficit of goods--> Remember that other indicators are important too!

Short period Current account deficit does not risk if its related to a fastly growing economy

Estonia has currently trade deficit

Biggest exporting countries for Estonia: Sweden, Finland

Importing countries: Germany, Finland

Trade surplus with Finland and Sweden

Trade deficit with Germany

 

Esports of services; EBS in Helsinki

Trade deficit: borrowing from foreigners, selling shares to foreigners--> the current USA

 

Lecture 20.09.2018

Forms of Exchange Rates

Bilateral rates tell a value of a  currency relative to a single other currency

To get the overall value we need to compare currencies with indexes

 

Rates of inflation (of prices) are important for exchange rates

--> important to at real exchange rates as well as nominal rates

-------------------------

''By contrast, the real exchange rate R is defined as the ratio of the price level abroad and the domestic price level, where the foreign price level is converted into domestic currency units via the current nominal exchange rate''

 Formally, R=(E.P*)/P, where the foreign price level is denoted as P* and the domestic price level as P. A decrease in R is termed appreciation of the real exchange rate, an increase is termed depreciation

---------------------------------

 

Forward Exchange rates: no money changes hands today; a forward exchange is a ''contract'' for both buyer and seller to transact. 

 

What determines exchange rates

-Markets; supply and demand  and governments/central banks; if they intervene in the markets  

3 theories of exchange rates

1.PPP- purchasing power parity-useful bust mostly wrong- works best only in the very long run

-Exchange rate reflects relative purchasing powers of two currencies.  

-if one country prices are rising faster then another's, the currency of the first should depreciate

-if good gets more expensive, its currency should get less expensive. 

 

Prediction: Bilateral exchange rate between currencies A and B

 

PP used to guess if currency is over-or undervalued 

Which prise to use for PPP= CPI, consumer price index

 

Exchange rates of poor countries tend to be low to PPP while rich countries  have high

Reason: prices of some goods effecting heavily on local inputs (rents and wages) that tend to be low in poor countries.

---> Best to only compare countries with similar incomes. 

 

Example Norway: PPP GD per capita less than with nominal GDP

 

 

´2.Asset theory-always right but useless

 

Exchange rate adjusts to eliminate the ...

 

Exchange rate must already be whatever people think it is about to be. 

Reason: if they were not

----> CHECK later

-rates do not respond to normal economic forces ( like the supply and demand but respond as soon as they are expected. 

-rates behave according to investor psychology which is irrational 

 

 

 

 

 

 

3.Supply and Demand model-best for understanding what has happened. -not much help in predicting the future 

- we say foreign exchange rather than currency

-- x quantity of E, Y exchange rate Dollars/Euros  (price of the foreign currency, not the dollar) .. microeonomic model 

Supply: 

Demand: us imports, us capital outflows, other; us investments income paymetns, transfers out

->thus all debits in balance of accounts

exampole

 

US traif increase on lots of goods /nixons 10 surcharge on imports 71)

-reduce demand for imports

-reduces demand  for euro

-shits D EUR left--> equilibrium moves 

 

US interest rate increase

-us bonds more attractive

-increase capital inflow to US

-increases demand for the dollar and thus the supply  of euro

Shifts S Eur rights--> depreciation of Euro

US dollar appreciates as:

-increase in demand for US exports

-Fall in foreign interest rates

-increase in the perceived riskiness of foreign assets

-Fall in US transfer payments to foreigners

--> opposites of all these will cause the dollar to depreciate

Example ECB increases interest rates before US 

 

Pegging

=to fix the exchangE

--> <overvalued pegging results in reduction