WEEK 1
Exchange rate: Price of foreign currency in units of domestic currency
Balance of payments = financial account and the current account
▶ Current account: transactions from exports and imports
▶ Financial account: international purchases and sales of financial assets
▶ Capital account: other international asset movements (e.g., debt
forgiveness and migrant transfer)
● All transactions enter twice. E.g., purchase of a car from Germany to NL, paid
by credit card
▶ Current account, import of goods
▶ Financial account, ’sale’ of credit card claim
Formula: Current account = Financial account + Capital account
-> "for each (net) export or capital account inflow, you receive a (net) financial asset"
OPEN ECONOMY
If CA> 0 → current account surplus
If CA<0 → current account deficit
CA balance = change in net foreign wealth → net foreign investment
Foreign exchange market
Major actors:
- Commercial banks (on behalf of its customers)
- Corporations who operate internationally
- Non-bank financial institutions
- transactions & investment
, - Central banks
Rate of return on exchange currency
● In equilibrium when, R* = R
Spot and forward exchange rates
- Spot exchange rate → exchange rate when trade is immediate
- Forward exchange rate → agreed upon exchange rate for future transactions
- Best expectations of future exchange rates → Ed/f = Eed/f
A fall in Eed/f (forward exchange rate)
→ leads to also a fall in the nominal exchange rate, Ed/f
, WEEK 2
Three main functions of money
1. medium of exchange
2. unit of account
3. store of value
Demand for money:
Individual factors:
- interest rate (-)
- liquidity/spending needs (+)
Main factors:
- interest rate (-)
- liquidity/spending needs (+)
- Price level (+)
- real national income (+)
Aggregate money demand
Exchange rate: Price of foreign currency in units of domestic currency
Balance of payments = financial account and the current account
▶ Current account: transactions from exports and imports
▶ Financial account: international purchases and sales of financial assets
▶ Capital account: other international asset movements (e.g., debt
forgiveness and migrant transfer)
● All transactions enter twice. E.g., purchase of a car from Germany to NL, paid
by credit card
▶ Current account, import of goods
▶ Financial account, ’sale’ of credit card claim
Formula: Current account = Financial account + Capital account
-> "for each (net) export or capital account inflow, you receive a (net) financial asset"
OPEN ECONOMY
If CA> 0 → current account surplus
If CA<0 → current account deficit
CA balance = change in net foreign wealth → net foreign investment
Foreign exchange market
Major actors:
- Commercial banks (on behalf of its customers)
- Corporations who operate internationally
- Non-bank financial institutions
- transactions & investment
, - Central banks
Rate of return on exchange currency
● In equilibrium when, R* = R
Spot and forward exchange rates
- Spot exchange rate → exchange rate when trade is immediate
- Forward exchange rate → agreed upon exchange rate for future transactions
- Best expectations of future exchange rates → Ed/f = Eed/f
A fall in Eed/f (forward exchange rate)
→ leads to also a fall in the nominal exchange rate, Ed/f
, WEEK 2
Three main functions of money
1. medium of exchange
2. unit of account
3. store of value
Demand for money:
Individual factors:
- interest rate (-)
- liquidity/spending needs (+)
Main factors:
- interest rate (-)
- liquidity/spending needs (+)
- Price level (+)
- real national income (+)
Aggregate money demand
