Week 8: Exchange Rate, the Balan

1. Official reserve zero, in pure floating exchange rate system

Current Account & Capital Account

Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit

2. Factors affect the exchange rate move

Week 8: Exchange Rate, the Balance of payment, and trade deficit

  1) Faster GDP growth will result in the currency depreciation because the faster growth country will tend to import more than export, thus created strong demand of the other country's currency.

Week 8: Exchange Rate, the Balance of payment, and trade deficit

  2) The higher inflation will result in currency depreciation due to law of one price

Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit

  3) Higher Interest rate will drive higher currency demand, thus will result in the currency appreciation.

  4) Trade imbalance: higher trade deficit means higher supply of currency which will result in currency depreciation.

Week 8: Exchange Rate, the Balance of payment, and trade deficit

  5) Trade of term

  When the trade of term improves, one country will generate more revenue from export and get back more foreign currency which will result in the higher demand of domestic currency thus the domestic currency will appreciate.

Week 8: Exchange Rate, the Balance of payment, and trade deficit

6) Currency Speculation

  The expectation of appreciation/depreciation will realized before the actual condition trigger due to speculator's activity.

Week 8: Exchange Rate, the Balance of payment, and trade deficit

7) Country environment (Political risk, geopolitical risk, and nature disaster)

Week 8: Exchange Rate, the Balance of payment, and trade deficit

3. Floating VS Fixed exchange rate system

Week 8: Exchange Rate, the Balance of payment, and trade deficit

4. Gold Specie flow adjustment mechanism

Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit Week 8: Exchange Rate, the Balance of payment, and trade deficit