Lecture Extender Examples 603
Chapter 33 Exchange Rates and the Balance of Payments
Between 2002 and 2005, French wine exports to the United States dropped by nearly 18 percent. Some
wine experts blamed part of the decline on what they perceived to be a drop in the quality of French wine.
Others blame
Economists offered a different explanation. During 2003, the dollar depreciated by almost 20 percent
relative to the euro. Even if the euro price of a bottle of French wine remained the same, U.S. residents
The Dollar and the Financial Crisis
In 2008, the dollar depreciated against the euro, reaching a low of $1.00 0.67 ( 1.00 $1.49). Then
the dollar began to appreciate slowly against the euro until the financial crisis struck in the United States
in October. As the financial crisis became global, some large European and British banks began to
experience difficulties and had to be bailed out by their governments. The central banks of the major
developed countries and the European Union (EU) coordinated their monetary policies. As the crisis
Does Competitiveness Apply to Countries as Well as Corporations?
or surplus measures in the balance of payments are that
is, its net expenditures relative to receipts. Economist Paul Krugman of the Massachusetts Institute of
four
important ways.
1. The bottom line for a corporation is truly its bottom line. If a corporation persistently fails to meet
3. U.S. residents typically consume about 90 percent of the goods and services produced within U.S.
4.
go to Microsoft Corporation, for instance. Countries may export and import large portions of their
goods and services, however.
Thus, we must be very cautious about drawing conclusions about the meaning of a deficit or surplus in a
South African Currency Appreciation
The global demand for gold and platinum, which are key South African exports, has been on a generally
upward trend from 2001 to 2012. By 2012, gold sold for more than $1,500 per ounce. As people outside
of South Africa sought to acquire more of its gold and platinum, the demand for its currency, the rand,
also increased. The result was an increase in the dollar price of the rand from $0.07 1.00 rand in 2005 to
$0.12 = 1.00 rand in 2012.
The Currency Most Traded in Foreign Exchange Markets
According to the Bank for International Settlements in its Triennial Central Bank Survey, the average daily
volume of trading in the global foreign exchange market in 2014 exceeded $5 trillion. The currency of
choice is the U.S. dollar, which in 2014 accounted for more than 85 percent of all foreign exchange
transactions. These exchange transactions are made to finance trade in goods and services as well as cross-
border trading of financial assets. Why are dollars involved in such a large percentage of payments for
,
The U.S. current account balance has been in deficit continuously since the early 1980s. This is not
something new. During the 1880s, the United States had many years of current account deficits. They
Lecture Extender Examples 605
Contrary to popular belief, the United States does not have a trade deficit because it is a weak economy
and cannot compete in world markets. Rather, the United States appears to be a good place in which to
invest capital because there are strong prospects for growth and investment opportunities. So long as there
are more foreigners who wish to invest in the United States than there are Americans who wish to invest
abroad, there will be a deficit in our current account balance. Americans are beneficiaries of international
capital flows.
Should We Go Back to the Gold Standard?
In the past several decades, the United States has consistently run a current account deficit. The dollar has
become weaker. We have had recessions, and we have had inflation. Some economists and politicians
argue that we should return to the gold standard. The United States has actually operated under two gold
standards. From 1879 to 1933, the dollar was defined as 32.22 grains of gold, yielding a price of
$20.671835 an ounce. During that time period, general prices more than doubled during World War I,
there was a major depression in 1920 1921, and the Great Depression occurred. The second gold standard
If Walma
manufactured in China, placing it ahead of Russia and the United Kingdom. The company accounts for
more than 10 percent of all U.S. imports from China. To obtain all the Chinese products it sells in its
606 Miller Economics Today, Nineteenth Edition