The global economy: balance of payments

Published on October 31, 2021   27 min
Please wait while the transcript is being prepared...
Hi, my name is Mariano Torras. I'm Professor of Economics at Adelphi University in New York. We're going to be doing a lecture series on macroeconomics.
In earlier lectures, we saw how the value of a nation's currency can influence the country's ability to export to and import from other countries. Since, as we saw earlier, a country's trade balance, that is the difference between the value of exports and the value of imports directly impacts on GDP and therefore employment and national wellbeing, there is much at stake in the relative value of a nation's currency. But there's even more to it. The value of the national currency also influences foreign investment activity, and as we will see, trade and investment are often seen as opposite sides of the same coin.
Let us begin with a quick review of the earlier circular flow model of the national economy. Recall that there are three types of leakages from the circular flow that signify a reduction in domestic economic activity, savings, taxes and imports. There are also three injections that stimulate the economy, investment, government spending and transfers and exports. Recalling the preceding lecture, it should make sense that if a nation's currency diminishes in value, it would make its exports more attractive. Since foreigners would be able to buy more of its currency, hence more of its products for a unit of their currency. As an example, if the Yen goes down in value relative to the dollar, Japanese cars would appear cheaper to the US market since the cars are priced in Yen and the US consumer would get more Yen per dollar, he or she effectively pays a lower price. And of course, the opposite is true, if a nation's currency goes up in value, it would tend to export less and import more.