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

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

Current Account & Capital Account

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2. Factors affect the exchange rate move

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  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.

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

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  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.

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  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.

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6) Currency Speculation

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

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

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3. Floating VS Fixed exchange rate system

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4. Gold Specie flow adjustment mechanism

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