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Current Account
-Records transactions arising from trade in goods and services
-consists of:
- trade account : Payments and receipts arising from import and export of goods and services
- Capital-service account (investment income) : Payment and receipts from income on assets (e.g.
interest and dividends)
Capital Account
-Records international transactions in assets (bonds, shares, real estate)
-ie. net change in national owner ship of assets
-consists of:
- Foreign direct investment
- Portfolio investment
- Other investment
- Reserve account
Current Account: CA = NX
GDP = C + I + G + NX = C + S + T
CA = S+ (T-G) - I
VARIABLES THAT AFFECT S/D in FX MARKET
1) FX rate - increase value of dollar ( increase imports, decrease exports) -> BOP deficit
2) Income - increase in income -> Buy more, increase imports (M) -> BOP deficit but*
-> increase foreign investment -> BOP surplus
3) Interest rates - increase real interest rate -> increase in foreign investment -> BOP surplus
4) Increase in price level - decrease exports -> BOP deficit
5) Relative price change - If stuff we export increases in price relative to our imports -> BOP surplus
6) Expectations - If foreigners expect increase in the value of the dollar -> BOP surplus
FISCAL POLICY (reaction
^ G-> ^ AD for g&s -> K-multiplier -> ^ income -> ^ imports -> BOP deficit
-> ^ money demand -> ^ interest rates -> ^ capital inflows
....-> BOP surplus
Net effect: -> BOP surplus
Flexible Fx
-> ^ FX -> ^ M v X -> v AD for g&s -> weakens the fiscal policy
In a Fixed FX:

-> ^ M/S -> ^AD for g&s -> fiscal policy is stronger

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Reaction to Monetary policy:
^ M/S -> Fed buys bonds -> ^ price of bonds -> v Int. rate -> ^ AD for g&s -> k-mult -> ^ income ->
^ Imports -> BOP deficit
from v Int. rate -> v capital inflows -> BOP deficit
Net effect: -> BOP deficit
Flexible FX
-> v FX -> v M ^X -> ^ AD for g&s -> Monetary policy is stronger
In a Fixed FX:
-> v M/S -> v AD for g&s -> weakens the monetary policy but v M/S continues until original increase is offset

Sterilization policy
(under fixed fx)
BOP deficit -> deplete foreign reserves -> Major drop in FX
BOP surplus -> accumulate foreign reserves -> ??
Non interest rate, inflation parity -> based case and new case, ignore that question, quiz is moved the week
after

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