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ECON 105 (187)
Lecture 10

Lecture 10 - Foreign Exchange

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ECON 105
Eldar Sehic

Foreign Exchange Balance of Payments (BOP) Records the country’s transactions with the rest of the world BOP Components Net Exports (NX): Exports (+) Imports (-) Net Receipts on income earned on assets (NR): Receipts (+) Payments (-) Capital Flows (KF): Inflows (+) Outflows (-) Official Financing Account (OFA): Sales of Foreign Currency (+) Purchases of Foreign Currency (-) BOP = NX + NR + KF + OFA = 0 “Balance of Payments” (“BOP”) Commonly heard in public “BOP” = NX + NR + KF If “BOP” > 0: It’s a “BOP” surplus, which implies that OFA < 0 (country makes more purchases than sales of Foreign Currency) If “BOP” < 0: It’s a “BOP” deficit, which implies that OFA > 0 (country makes more sales than purchases of Foreign Currency) Foreign Currency Market Exchange Rate (e): Price of Foreign Currency (FC) e FCS ē FCD FC ē: Market (flexible) exchange rate Changes in FCD: (Not due to changes in e) If imports ↑ or if there is capital outflow, then FCD moves right e FCS e2 e 1 FCD 2 FCD1 FC Changes in FCS: (Not due to changes in e) If exports ↑ or if there is capital inflow, then FCS moves right e FCS 1 FCS 2 e 1 e 2 FCD FC Fix Fixed Exchange Rate (e ) Determined by central bank buying and selling FC Fixing e above ē at e :x e FCS eFix ē FCD FC To fix e at e , the central bank buys FC to satisfy the ex
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