Mgec61 Note - Chapter 13 Essay

1022 Words Nov 30th, 2015 5 Pages
MGEC61 – International Economics: Finance

Introduction


International finance is a study of problems and policies of an open economy.



International finance studies the issues like unemployment, savings, trade imbalances,
money and price levels (include exchange rates).

Organization of the course
1) Introduction – chapter 13
2) Interest rate parity (how exchange rate is determined by the flows of capital) and
exchange rate overshooting – chapters 14 & 15
3) Purchasing power parity and the exchange rate in the long run (how exchange rate is
determined by the flows of goods and the determinants of exchange rate in the long
run) – chapter 16
4) The DD-AA model (the model that explains how exchange rate and output are
determined in
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MGEC61 – Chapter 13

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Example: Suppose the country runs a CA surplus, CA > 0:
 Exports of goods and services > Imports of goods and services.
 Export revenues earned > Import payments made.

The Balance of Payments Accounts (BOP Accounts)


The balance of payments (BOP) accounts record a country’s international
transactions with the rest of the world in a given time period.
 The BOP accounts record a country’s payments to and its receipts from
foreigners.
 The BOP accounts also show the sources of demand and supply of a country’s
currency in the foreign exchange market.



The BOP accounting uses the system of double-entry bookkeeping: every
international transaction automatically enters the BOP accounts twice, once as a
credit and once as a debit. It is because if we buy something from a foreigner, we
must pay him/her in some way, and the foreigner must then spend or store our
payment, and vice versa.



Credit entry: any transaction resulting in a receipt from foreigners.
 Examples include exports of goods, services, or assets.



Debit entry: any transaction resulting in a payment to foreigners
 Examples include imports of goods, services, or assets.

MGEC61 – Chapter 13

© Iris Au

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Components of BOP Accounts

BOP accounts

Current Account
(CA)

Financial Account

Capital Account

(KA)

Non-Reserve portion of KA,…