An article in the Wall Street Journal stated, “The trade outlook in the U.S. has improved slightly overall this year. One big factor behind the smaller gap: Stronger growth in Asia and Europe.”

How would stronger growth in Asia and Europe lead to a smaller trade gap?

[Related to the Apply the Concept on page 1039] An article in the Wall Street Journal stated, “With the uncertainty lifting and economy doing well, the European Central Bank is more likely to taper the massive stimulus program that has helped keep pressure on the euro.”

What does the article mean by “pressure on the euro”?

[Related to the Don’t Let This Happen to You on page 1033] In 2016, Germany had a balance of trade surplus of €253 billion and a current account surplus of €266 billion. Explain how Germany’s current account surplus could be larger than its trade surplus. In 2016, what would we expect Germany’s balance on the financial account to have been? Briefly explain.

Use the information in the following table to solve for the value of the statistical discrepancy and prepare a balance of payments account, like the one shown in Table 29.1 on page 1031. Assume that the balance on the capital account is zero.

[Related to the Apply the Concept on page 1035] On January 1, 2002, there were 15 member countries in the European Union. Twelve of those countries eliminated their own individual currencies and began using a new common currency, the euro. For a three-year period from January 1, 1999, through December 31, 2001, these 12 countries priced goods and services in terms of both their own currencies and the euro. During that period, the values of their currencies were fixed against each other and against the euro. So during that time, the dollar had an exchange rate against each of these currencies and against the euro. The following table shows the fixed exchange rates of four European currencies against the euro and their exchange rates against the U.S. dollar on March 2, 2001. Use the information in the following table to calculate the exchange rate between the dollar and the euro (in euros per dollar) on March 2, 2001.

What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?

In 2016, France had a current account deficit of €19 billion (approximately €21 billion). Did France experience a net capital outflow or a net capital inflow during 2016? Briefly explain.

The late economist Herbert Stein described the accounts that comprise a country’s balance of payments: A country is more likely to have a deficit in its current account the higher its price level, the higher its gross [domestic] product, the higher its interest rates, the lower its barriers to imports, and the more attractive its investment opportunities—all compared with conditions in other countries—and the higher its exchange rate. The effects of a change in one of these factors on the current account balance cannot be predicted without considering the effect on the other causal factors.

Briefly explain why, compared to other countries, a country is more likely to have a deficit in its current account, holding other factors constant, if it has each of the following.

i. A higher price level

ii. An increase in interest rates

iii. Lower barriers to imports

iv. More attractive investment opportunities

The late economist Herbert Stein described the accounts that comprise a country’s balance of payments: A country is more likely to have a deficit in its current account the higher its price level, the higher its gross [domestic] product, the higher its interest rates, the lower its barriers to imports, and the more attractive its investment opportunities—all compared with conditions in other countries—and the higher its exchange rate. The effects of a change in one of these factors on the current account balance cannot be predicted without considering the effect on the other causal factors.

Briefly describe the transactions included in a country’s current account.

Why do foreign households and foreign firms demand U.S. dollars in exchange for foreign currency? Why do U.S. households and firms supply U.S. dollars in exchange for foreign currency?

Suppose that the current exchange rate between the dollar and the euro is €0.85 = $1. If the exchange rate changes to €0.90 =$1, has the euro appreciated or depreciated against the dollar? Briefly explain.

What is the difference between net exports and the current account balance?

In mid-2017, a headline in the Wall Street Journal stated, “China’s Yuan Makes Biggest Leap in Five Months.” Was this good news or bad news for firms such as Apple and Yum Brands (which owns KFC and Pizza Hut) that have stores or restaurants in China? Briefly explain.

[Related to the Chapter Opener on page 1028] In its 2016 Annual Report, Amazon stated, “We have foreign exchange risk.”

If Amazon did not have operations in foreign countries, would its profit be affected in any way by fluctuations in the exchange value of the U.S. dollar? Briefly explain.