Mgec61 Note - Chapter 13 Essay

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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…show more content…
MGEC61 – Chapter 13 © Iris Au 2  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 3 Components of BOP Accounts BOP accounts Current Account (CA) Financial Account Capital Account (KA) Non-Reserve portion of KA,
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