Module 41: Capital Flows and the Balance of Payments

Module 42: The Foreign Exchange Market

Module 43: Exchange Rate Policy and Macroeconomic Policy

Module 44: Barriers to Trade

Module 45: Putting It All Together

Economics by Example: “Is Globalization a Bad Word?”

“You should see, when they come in the door, the shopping bags they hand off to the coat check. I mean, they’re just spending. It’s Monopoly money to them.” So declared a New York restaurant manager, describing the European tourists who, in the summer of 2008, accounted for a large share of her business. Meanwhile, American tourists in Europe were suffering sticker shock. One American, whose family of four was visiting Paris, explained his changing vacation plans: “We might not stay as long. We might eat cheese sandwiches.”

It was quite a change from 2000, when an article in the New York Times bore the headline: “Dollar makes the good life a tourist bargain in Europe.” What happened? The answer is that there was a large shift in the relative values of the euro, the currency used by much of Europe, and the U.S. dollar. At its low point in 2000, a euro was worth only about 85 cents. By mid-2008 it was worth more than $1.50; in early 2010 its value had fallen again, to less than $1.25. In early 2014, a euro was worth $1.36.

What causes the ups and downs of the relative value of the dollar and the euro? What are the effects of such changes? These are among the questions addressed by open-economy macroeconomics, the branch of macroeconomics that deals with the relationships between national economies. In this section we’ll learn about some of the key issues in open-economy macroeconomics: the determinants of a country’s balance of payments, the factors affecting exchange rates, the different forms of exchange rate policy adopted by various countries, and the relationship between exchange rates and macroeconomic policy. In the final module we will apply what we have learned about macroeconomic modeling to conduct policy analysis.