Balance of payments and

Exchange Rates

Balance of payments and

Exchange Rates

Balance of payments & exchange ratesBalance of payments & exchange rates

The balance of payments account

Example of UK balance of payments

The balance of payments account

Example of UK balance of payments

Balance of payments & exchange ratesBalance of payments & exchange rates

The balance of payments account

The current account

The balance of payments account

The current account

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

Current account balance as % ofGDP in selected countries: 1970–2003

Current account balance as % ofGDP in selected countries: 1970–2003

-5

-4

-3

-2

-1

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2000

Cur

rent

acc

ount

bal

ance

:% o

f GD

P

UK

-5

-4

-3

-2

-1

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2000

Cur

rent

acc

ount

bal

ance

:% o

f GD

PCurrent account balance as % of

GDP in selected countries: 1970–2003Current account balance as % of

GDP in selected countries: 1970–2003

USA

UK

-5

-4

-3

-2

-1

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2000

Cur

rent

acc

ount

bal

ance

:% o

f GD

PCurrent account balance as % of

GDP in selected countries: 1970–2003Current account balance as % of

GDP in selected countries: 1970–2003

USA

Japan

UK

-5

-4

-3

-2

-1

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2000

Cur

rent

acc

ount

bal

ance

:% o

f GD

PCurrent account balance as % of

GDP in selected countries: 1970–2003Current account balance as % of

GDP in selected countries: 1970–2003

Balance of payments & exchange ratesBalance of payments & exchange rates

The balance of payments account

The capital account

The balance of payments account

The capital account

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

Balance of payments & exchange ratesBalance of payments & exchange rates

The balance of payments account

The financial account

The balance of payments account

The financial account

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

Balance of payments & exchange ratesBalance of payments & exchange rates

The balance of payments account

The overallbalance of payments

The balance of payments account

The overallbalance of payments

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

UK balance of payments: 2001 (£ millions)UK balance of payments: 2001 (£ millions)

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesExchange rates

Sterling exchange rates: 1980–2003Sterling exchange rates: 1980–2003

Sterling exchange rates: 1980–2003Sterling exchange rates: 1980–2003

Sterling exchange rates: 1980–2003Sterling exchange rates: 1980–2003

Sterling exchange rates: 1980–2003Sterling exchange rates: 1980–2003

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesDetermination of the

exchange rate

Exchange ratesDetermination of the

exchange rate

1.00

1.20

1.40

1.60

1.80

2.00

2.20

0

$ pr

ice

of £

Q of £

Determination of the rate of exchangeDetermination of the rate of exchange

1.00

1.20

1.40

1.60

1.80

2.00

2.20

0

$ pr

ice

of £

D by USA

Q of £

Determination of the rate of exchangeDetermination of the rate of exchange

1.00

1.20

1.40

1.60

1.80

2.00

2.20

0

$ pr

ice

of £

QS

S by UK

Q of £

Determination of the rate of exchangeDetermination of the rate of exchange

D by USA

QD

b a

1.00

1.20

1.40

1.60

1.80

2.00

2.20

0 QS QD

d$ pr

ice

of £

Determination of the rate of exchangeDetermination of the rate of exchange

S by UK

Q of £

c

D by USA

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesChanges in theexchange rate

Exchange ratesChanges in theexchange rate

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

Floating exchange rates: movement to a new equilibriumFloating exchange rates: movement to a new equilibrium€

/ £

S1

D1

Q of £

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€ / £

S1

D1

S2

Q of £

Floating exchange rates: movement to a new equilibriumFloating exchange rates: movement to a new equilibrium

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€ / £

S1

D1

S2

D2

Q of £

Floating exchange rates: movement to a new equilibriumFloating exchange rates: movement to a new equilibrium

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesSpeculation against

exchange rate movements

Exchange ratesSpeculation against

exchange rate movements

O

Exc

ha

nge

ra

te

Quantity of £s

S1

D1

er1

Stabilising speculationStabilising speculation

O

Exc

ha

nge

ra

te

Quantity of £s

er2

S2

D2

S1

D1

er1

Stabilising speculationStabilising speculation

O

Exc

ha

nge

ra

te

Quantity of £s

S3

D3

er3

er2

S2

D2

S1

D1

er1

Stabilising speculationStabilising speculation

O

Exc

ha

nge

ra

te

Quantity of £s

S1

D1

er1

Destabilising speculationDestabilising speculation

O

Exc

ha

nge

ra

te

Quantity of £s

S2

D2

er2

S1

D1

er1

Destabilising speculationDestabilising speculation

O

Exc

ha

nge

ra

te

Quantity of £s

S2

D2

er2

er3

S3

D3

S1

D1

er1

Destabilising speculationDestabilising speculation

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesMovements in the sterling exchange rate over time

Exchange ratesMovements in the sterling exchange rate over time

$ / £ exchange rate and £ exchange rate index: 1976-2003$ / £ exchange rate and £ exchange rate index: 1976-2003

$ / £

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

70

80

90

100

110

120

130

140

150

$ / £ exchange rate and £ exchange rate index: 1976-2003$ / £ exchange rate and £ exchange rate index: 1976-2003

$ / £

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

70

80

90

100

110

120

130

140

150

$ / £ exchange rate and £ exchange rate index: 1976-2003$ / £ exchange rate and £ exchange rate index: 1976-2003

$ / £Index

1990=100

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

70

80

90

100

110

120

130

140

150

$ / £ exchange rate and £ exchange rate index: 1976-2003$ / £ exchange rate and £ exchange rate index: 1976-2003

$ / £Index

1990=100

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

70

80

90

100

110

120

130

140

150

Balance of payments & exchange ratesBalance of payments & exchange rates

Exchange ratesMovements in the

dollar/euro exchange rate from 1999 to 2003

Exchange ratesMovements in the

dollar/euro exchange rate from 1999 to 2003

Fluctuations between the euro and the dollarFluctuations between the euro and the dollar

Fluctuations between the euro and the dollarFluctuations between the euro and the dollar

US interest rate

Fluctuations between the euro and the dollarFluctuations between the euro and the dollar

US interest rate

ECBinterest rate

Fluctuations between the euro and the dollarFluctuations between the euro and the dollar

$ / €US interest

rate

ECBinterest rate

$ / €