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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
$ / €