Question

The Balance of Payments

• In Chapter 33, read “The Balance of Payments” section and answer the following questions:
1. What’s likely to happen to the value of the American dollar when the number of imports is greater than the number of exports?
2. Why do economists pay attention to the balance of trade?

Financing International Trade

• In the Chapter 33 Exercises section, complete the multiple-choice and matching questions.

Financing International Trade
Read this assignment. Then read Chapter 33 in your textbook.

What Is Meant by the Rate of Exchange?
The currencies of other nations are often referred to as foreign exchange.

The price at which one nation’s currency can be bought using another nation’s currency is known as the rate of exchange. You can see an example of exchange rates at the bottom of page 493 of your textbook.

The exchange rate is important for people who do business across national boundaries, people who travel to other countries, and people who buy foreign-made products. Currency must be converted before buying from another country, and the rate of exchange can fluctuate based on factors you’ll learn later in the chapter.

Most commercial banks will sell foreign currencies to travelers in small amounts. Businesses trading in foreign nations may buy a foreign-currency draft, which is a check payable in foreign currency. Another way of doing business would be to have the importer’s bank make payments in the foreign nation’s currency. Read about rates of exchange on pages 493–494 of your textbook.

How Are Exchange Rates Determined?
The rates at which currency is exchanged can be determined in two ways:

1. Fixed exchange rates. Under a fixed exchange rate system, the government of a country agrees to exchange their currency for a fixed amount of another currency. This rate is set and enforced by the government. Such a system is rare in the modern world and would be put in place possibly to fight inflation or stabilize the value of a nation’s currency—at the cost of flexibility with the money supply.
2. Floating exchange rates. A floating exchange rate means the issuing nation allows its currency to gain or lose value in relation to other currencies based on supply and demand. The value of the currency is based on the demand for that nation’s goods and services in the world market. If people around the world are buying more American goods, then American dollars will also be in demand. (Remember you must trade in the local nation’s currency if you’re buying from them.) Higher demand leads to a higher “price,” or value, for the currency relative to other currencies. If demand for a nation’s products goes down, that nation’s currency is likely to see a reduction in value.

When it comes to currency, there are other factors that impact the rate of exchange:

• Stability of the issuing government. In tough economic times, international investors are likely to buy a nation’s currency if it holds value over time. Governments and economies that have shown stability will attract these investors, driving up the value of that currency.
• Special trade arrangements. Due to its influence in the world, the United States has positioned the US dollar as the trade currency for much of the world’s oil. If a business anywhere in the world wants to buy oil, chances are they’ll need to do so with American dollars. Because of this, there’s an increased demand for dollars.

Why Should We Be Interested in the Rate of Exchange?
Exchange rates have an impact on both individuals and businesses in any economy. On an individual level, a strong dollar makes imported goods cheaper for Americans. The reverse is also true: A weak dollar makes imports more expensive for Americans.

The strength of the exchange rate also affects businesses. When the dollar is highly valued, it makes American exports more expensive for consumers in other nations. This leads to a decrease in demand for American-made products as well as a scaling back of American businesses. A weaker dollar makes American-made products more attractive (cheaper) for foreign consumers and often helps American exporting businesses.

Answer 1

1. When the number of imports is greater than the number of exports, it is likely that the value of the American dollar will decrease. This is because there is a higher demand for foreign currencies to pay for imports, which increases the supply of American dollars in the foreign exchange market. As a result, the value of the American dollar relative to other currencies decreases.

2. Economists pay attention to the balance of trade because it is an important indicator of a country's economic health and competitiveness. The balance of trade measures the difference between the value of a country's exports and the value of its imports. A positive balance of trade, where exports exceed imports, indicates that a country is earning more from selling goods and services abroad, which can boost its economy. On the other hand, a negative balance of trade, where imports exceed exports, suggests that a country is spending more on foreign goods and services, which can have a negative impact on its economy. By analyzing the balance of trade, economists can assess the trade performance of a country and identify areas of strengths and weaknesses in its international trade. This information can be used to formulate policies and strategies to promote economic growth and maintain a favorable trade position.

Step-by-step explanation:

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