Balance of Payments

Current account: Balance of Trade (Net Exports), Investment Income, and Net Transfers

Capital & Financial Account: Foreign Direct Investment (stays in foreign country) and bonds

Foreign Exchange

• You supply your own currency.

• You demand the other currency.

• Appreciation: "Stronger"

• Depreciation: "Weaker"

• Shifters:

  • Tastes

  • Income

  • Price Level

  • Interest Rates (higher is better)

• If you shift supply on one graph, you shift demand on the other graph.

• Effect of Appreciation: Imports increase, Exports decrease, Net exports decrease

• Effect of Depreciation: Imports decrease, Exports increase, Net exports increase