Open Economy and Exchange Rates - created from Mind Map

International Exchange

Exchange Rates Foreign Exchange rate: The foreign exchange (forexchange) market is where one country’s currency can be exchanged for another. Balance of payment Domestic Price:  domestic currency per unit of foreign currency e.g. NZ$1.11 per AU$1.00  Demand for NZ dollar Supply of NZ dollars Currency Depreciation Currency Appreciation The current Account The Capital Account Balance of trade: Trade Deficit

Open Economy net exports of goods and services What determines the level of imports? Marginal propensity to import (MPM)

countries trade with one another to obtain goods and services that they cannot produce or to take advantage of the fact that other countries can produce themselves at lower cost than they can (comparative advantage)

The price of one countries currency e,g, Japanese yen or NZ$ dollar, in terms of another country's currency.  e.g. in japanese yen, the price of the surf board costs 20,000円 and the exchange rate in NZ$ dollar is 87.9円  thefore we use the formula e/p  will be 20,000/87.9 = 227.5 in NZ$

All currencies other than domestic currency of a given  country or when one country's currency can be exchanged for another

the record of country's transactions in goods, services, and assets with the rest of the world; also record of a country's sources (supply) and use demand of foreign exchange    it is divided into two accounts - current account  - capital account

Net exports of goods (Export - imports)  + net exports of services (Export of service - Import of service)  + net investment income  + net transfer payment  = the balance on current account  - it shows how much nation has spent on foreign goods, services, investment income payments and transfers relative to how much it has earned from other countries. 

the difference between a country;s exports of goods and services and imports of goods and services 

it occurs when a country's exports of goods and services are LESS than its imports of goods and services (X<M)

the capital of account of the balance of payments records the changes in these assets and liabilities.

   •domestic currency per unit of foreign currency e.g. NZ$1.11 per AU$1.00   

aggregate expenditure in an open economy : AE = C + I+ EX - IM AE = aggregate expenditure C = consumption behavior of households I =  investment behavior of firms G = government spending EX =  net exports of goods and services

(EX - IM)  the difference between a country's total exports and total imports

IM = mY  when individual's income rises, imports tend to increase also. Y = income m = positive number (m is assumed to less than $1; otherwise, a $1 increase in income generate s an increase in imports more than  $1, which is unrealistic)

the change in imports caused by a $1 change in income. 

   The demand curve for dollars represents the demand by foreigners for NZ currency.   The demand curve is downward sloping.  If E↑, the dollar is more expensive to foreigners so they buy fewer dollars. The demand curve for dollars shifts right (increase in demand ) when foreigners want to:  - Buy more NZ exports (goods and services) increse in EX or export   - Invest more in New Zealand (by buying New Zealand assets) increase in I (investment)  

 NZ citizens’ supply of dollars to buy foreign goods and investments   The supply curve is upward sloping.   If E↑, foreign currency and foreign goods are cheaper, so NZ residents supply a greater quantity of dollars. The supply curve of dollars shifts when NZ residents wish to:- Buy more imported goods- Invest more in foreign countries  

it is a loss of value of a country's currency with respect to one or more foreign reference.  if exchange rate of NZ$ decreases therefore it has depreciation . this can be determined by the fluctuation (it changes either increase or decrease) of the exchange.

sometimes exchange rates tend to increase or unofficial increase of the exchange rate and this is due to the market forces and this shifts the Exchange rate to increase which shifts the supply curve due to the increase in cost.

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Open Economy and Exchange Rates

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