UNIT 6 Macroeconomics LESSON 3 - Denton ISD

1 Advanced Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3 UNITI ntroduction and DescriptionInternational trade and the methods oflimitingtrade are extremely important to understandingmuch ofthe current discussions about the WorldTrade Organization (WTO) and the North Ameri-can Free Trade Agreement (NAFTA).This lessonexplains and uses for analysis the concepts ofbal-ance ofpayments and foreign exchange Activity 52,the students apply theirunderstanding ofthe balance 53 provides the students withpractice using exchange rates and understandingthe effects that changes in economic variables canhave on exchange current account,capital account,balanceoftrade, balance ofpayments,debit how international trade is a country s balance how international transactions affectthe balance oftrade and the balance how the international value ofthe dol-lar is how economic events affect the inter-national value ofthe RequiredTwo class periods or 90 52 and current newspaper headlines to show thestudents the need to understand the balance oftrade and the balance a brieflecture on the current account,thebalance oftrade.

2 The capital account and thebalance the major com-ponents ofeach account,as well as which trans-actions are considered to be a debit and whichare considered to be a the students read the introductory materialofActivity any questions the stu-dents may pose,then have them complete Activ-ity the answers with the a brieflecture on the foreign the demand for currency that canbe used in trade to the supply and the factors that shift these Visual and emphasize these points:nIfthe exchange rate increases,the quantitydemanded falls and the quantity change in any factor other than the exchangerate will cause the demand curve or the supplycurve to example,ifFrance s incomeincreases,then France s demand for will increase because the French will wantto buy more American rates in the United States changerelative to interest rates in other countries orifthe expected future exchange rate changes,then the demand curve will fixed and flexible exchange rate the students begin Activity 53 in the students complete Activity 53 for the answers with the Finance658 Advanced Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 52 AnswerKey UNITI mbalance ofPaymentsPart ATo make sure you understand the components ofthe current account.

3 The capital account and thedifference between a credit (transaction that earns foreign exchange) and a debit (transaction thatuses foreign currency),identify each ofthe following transactions on the Figure by putting check marks in the appropriate boxes for credit or debit and forcapital or current first one has been done for on the ofPaymentsCreditDebitCurrentCapital+ AccountAccount1. Harley Davidson USApurchases $25 million inproduction machinery from a Japanese Andr Prenoor, entrepreneur, invests $50 million to develop a theme park in AChinese company sells $1 million worth of beretsto the BMW pays $1 million to a shipper for transporting cars from Germany to the United Each month, Ima Grent, who recently arrived in the United States, sends half her paycheck to her sister in Bank of America pays $5 million in interest to French Senor Ramos from Spain buys a shopping center in ABrazilian investor buys five $10,000 Treasury German tourists spend $3 million in the United States.

4 Tourists spend $5 million in Brit-Disz, a London record store, spends $10,000 on CDs by the Generic Gurls, a kiddy-pop Sam Boney, ice-rink magnate, buys stock in a Chilean ice-rink Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 52 AnswerKey UNITPart the data in Figure the missing figures,and answer the questions that balance ofPayments,Z-LandCurrent AccountZ-Land exports of goods$+300Z-Land imports of goods 400Z-Land exports of services+150Z-Land imports of services 120 balance of trade 70_____Net investment income+10 Net transfers 14 balance on current account 74_____Capital AccountZ-Land capital going abroad 110 Foreign capital coming into Z-Land+160 balance on capital account+50_____Balance on Current AccountPlus balance on Capital Account 24_____Official Reserves AccountOfficial reserves transactions balance +24_____Total$ Z-Land have a current account deficit or surplus?

5 How do you know? Z-Land is running acurrent account ofgoods and services exceed exports ofgoods and central bank intervention,does Z-Land carry a balance ofpayments surplus or deficit?How do you know? Z-Land is running a balance ofpayments deficit because the capital accountsurplus (+$50) does not fully offset the current account deficit ( $84). runs a balance ofpayments deficit,how can this difference be made up? Ifit carries abalance ofpayment surplus,what will happen? Z-Land must either borrow to bring its balance ofpayments deficit to $0,or it must use its official reserves to make up the runsa balance ofpayments surplus,it can add the excess earned currency to its official Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 53 AnswerKey UNITE xchange RatesPeople,firms and nations exchange products for money and use the money to buy other products orto pay for the use an economy,prices are stated in the domestic currency,such or European use their currency to purchase marketsare in other countries who export goods want to be paid in their own currenciesso they can carry out a result.

6 A foreign exchange marketdevelops where national cur-rencies can be markets serve the need ofall international buyers and prices in these markets are called exchange exchange rate is the rate at which thecurrency ofone nation is exchanged for the currency shows the exchange rates for selected countries for May and August ofthe same RatesCost ofCost ofForeign Dollar inin DollarsForeign Currency( dollars / foreign currency)(foreign currency / dollars) AUsing the data in Figure ,calculate the cost ofthe following products in solve,dividethe cost ofthe product in the foreign currency by the cost ofthe in the foreign Adinner for two that costs 500 Mexican pesos$ $ Ahotel room that costs 30,000 Japanese ABMW that costs 85,000 euros in Germany73, , Apound of Swedish meatballs that costs 30 Apair of pants that costs 72 pounds in Aleather jacket that costs 1,800 Canadian dollars1, , student may also multiply the cost ofthe product times the cost offoreign currency in will yield slightly different numbers because Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 53 AnswerKey the exchange table in Figure.

7 Calculate how much foreign tourists would have to pay intheir own currency for an American meal that costs $ solve,divide the cost in the cost ofthe foreign currency in yen7, , the value ofthe dollar appreciate (increase) or depreciate (decrease) against the followingcurrencies between May and August?AppreciateDepreciateBritish poundXCanadian dollarXEuropean euroXSwedish kronaXJapanese yenXMexican pesoXPart BConsider the following each case,an underlying event causes a change in the supply and demand for the impact ofeach scenario on each first example isdone for you as a Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 53 AnswerKey prices rise relative to the prices ofGerman :Americans will demand less expensive German goods,thereby increasing the demand foreuros and supplying more dollars to the foreign exchange rates in the United States rise faster than interest rates in.

8 Canadian investors will demand to purchase ,causing to supply ofCanadian dollars will increase because Canadians aretrading Canadian dollars for Canadian dollar will of Goods IncreaseQUANTITY DOLLAREXCHANGE RATES1 SDQUANTITY OF DOLLAR/EUROEXCHANGE RATED1 SDFigure Rates in the United States IncreaseQUANTITY DOLLAREXCHANGE RATES1 SDQUANTITY OF CANADIAN DOLLAREXCHANGE RATED1 SDAdvanced Placement Economics Teacher Resource Manual National Council on Economic Education,New York, 3nACTIVITY 53 AnswerKey tourists flock to Mexico s :The demand for pesos increases to pay for the beach supply ofeurosincreases because the French are exchanging euros for Mexican Mexican peso isappreciating,and the euro is video games become popular with :Demand for Japanese yen increases as buy more Japanese video games;the supply ofdollars to the exchange market Japaneseyen Tourists Visit MexicoQUANTITY OFMEXICAN PESOSEURO/PESOEXCHANGE RATES1 SDQUANTITY OF EUROSPESO/EUROEXCHANGE RATED1 SDFigure Children Want Videos Produced in JapanQUANTITY DOLLAREXCHANGE RATES1 SDQUANTITY OFJAPANESE DOLLAR/YENEXCHANGE RATED1SD