国际金融学课件：Chapter 5 Adjustments in the Balance of Payments the Price Adjustment Mechanism

1、Adjustments in the Balance of Payments: the Price Adjustment Mechanism5Chapter Objective:This chapter will give you some discussion about how the exchange rates affect the balance of payment, including the adjustments of price under different system.Chapter Five outline1.Introduction2.Adjustment und

2、er flexible system(1) Balance of payments adjustments with exchange rate changes(2) Stable and unstable FOREX market(3) The Marshall-Lerner condition(4) Elasticities and J curves3. Adjustment under fixed system(1)Gold standard(2) The Price-Specie-Flow Mechanism1.IntroductionWe examine how a deficit

3、or surplus in a nations balance of payments can be corrected by price changes , income under a fixed and flexible exchange rate system.The methods of correcting balance-of-payments disequilibria are classified as automatic or policy.An automatic adjustment mechanism:activated by the balance-of-payme

4、nts disequilibrium itself,without any government action, and operates until the disequilibrium is eliminated . Serious negative side effects Adjustment policies: specific measures adopted by the government with the primary aim of correcting a balance of payments disequilibrium, involving a time lag.

5、Choose the method that minimizes the cost of the adjustment.1.Introduction 2. Adjustment under flexible systemConsumers and firms will substitute among goods as price change to stretch their budgets as far as possible.relative prices: determining consumption patterns, the price of one good relative

6、to another. It change as relative demands for and supplies of individual goods change.If the changes involve prices of goods at home changing relative to foreign prices, international trade patterns may be altered.The elasticities approach: concerned with how changing relative prices of domestic and

7、 foreign goods will change the balance of trade.(1)Balance of payments adjustments with exchange rate changesSR00R1In the FOREX market, increase in demand for euros, several responses possible to the shift in demand.the euro will appreciate, flexible exchange rates, DD(1)Balance of payments adjustme

8、nts with exchange rate changesCentral banks can peg the by providing - form their reserves.The supply and demand curves :artificially shifted by imposing controls or quotas.Quotas or tariffs could be imposed on foreign trade to maintain the old supply of and demand for euros.This approach is only in

9、 a world without capital flows. The elasticities approach recognizes that the effect of an exchange rate change on the equilibrium quantity of currency being traded will depend on the elasticities of the supply and demand curves involved.R010(1)Balance of payments adjustments with exchange rate chan

10、ges AE is aE BE is bEABERQDerivation of the demand curve for foreign exchangePM DM B DM Q0 QM If home currency devaluates, remain Q0 , DM to DM demands of foreign exchange reduced.Supply of foreign exchange reduced too.SMEP0PE0PM DM B DM Q0 QM PM DM B DM Q0 QM Derivation of the supply curve for fore

11、ign exchangePXDevaluation , exporters give much more, to If remain exporters like offer goods at lower price.Foreign demands will rise.SXSXQ0 QXQ0DXSXSXAEP0PE0Balance of payments adjustments with exchange rate changesThe elasticity measures the responsiveness of quantity to changes in price.The elas

12、ticities approach to the balance of trade provides an analysis of how devaluations will affect the balance of trade depending on the elasticities of supply and demand for foreign exchange or foreign goods. Balance of payments adjustments with exchange rate changesWhen demand or supply is elastic, th

13、e quantity demanded or supplied will be relatively responsive to the change in price.If Ed1, demand is elastic.If Es1, supply is elastic.Balance of payments adjustments with exchange rate changesSuppose the demand for black velvet painting from Mexico is elastic. If the peso price rises 10%,the dema

14、nded quantity falls by more than 10%,the revenue( PQ) received from sales will fall after the price change.If Colombian coffee inelastic: a 10% increase in price, result in a fall in the quantity demanded of less than 10%. Higher coffee price more than makes up for the lost sales, coffee sales reven

15、ues rise after the price change.Elasticity of demand :important to determine export and import revenues as international prices changes.(2)Stable and unstable FOREX marketWill the devaluation improve the balance of trade? And how about its results? Relate to supply and demand curves.Stable market R

16、QSD(2)Stable and unstable FOREX marketR QR QSDSD(3)The Marshall-Lerner conditionEven if stable FOREX market, rather easy to correct the trade balance, the elasticity of the demand and supply of foreign exchange from the demand for and supply of nations imports and exports.The condition whether the F

17、OREX market is stable or not is called the Marshall-Lerner condition.(3)The Marshall-Lerner conditionorBalance of trade(3)The Marshall-Lerner condition(3)The Marshall-Lerner condition(3)The Marshall-Lerner conditionIf |M+ X|1, stable market, devaluation corrects the trade balanceIf | M+ X|1, unstabl

18、e market, not correct the trade balanceIf | M+ X|=1, a change in the exchange rate will leave the trade balance unchanged(4)Elasticities and J curvesTrade balance TWith inelastic demands, it is possible to get J curve effects.J curve effects: after a depreciation the balance of trade worsen for a wh

19、ile before increasing.3. Adjustment under fixed exchange rate(1)Gold StandardUnder the gold standard, each nation defines the gold content of its currency and passively stands ready to buy or sell any amount of gold at that price.(mint parity)Gold point(2)The Price-Specie-Flow MechanismSince each na

20、tions money supply under this system consisted of either gold itself or paper currency backed by gold, the money supply would fall in the deficit nation and rise in the surplus nation. As a result, the exports of the deficit nation would be encouraged and its imports would be disencouraged until the

21、 deficit was eliminated.(2)The Price-Specie-Flow MechanismBased on the quantity theory of money MV=PQ M: the nations money supply V:the velocity of circulation of money P: the general price index Q: physical output(2)The Price-Specie-Flow MechanismClassical economists : V is constant, at the full-employment level Q was assumed to be fixed. Wit