24. Explain the difference between autonomous and offsetting (or accommodating) transactions.

Autonomous transactions are independent of the balance of payments in the sense that they are affected by factors outside the balance of payments statement. These include exports, imports, transfers, public transactions, and net capital movements. Imports and exports are the result of cost differences among countries (i.e., international competitiveness). Transfers and public transactions are based on military, political, or humanitarian considerations (i.e., military aid or humanitarian aid following natural disasters). Capital movements are dependent on expectations about returns on foreign investments (i.e., interest rate and exchange rate considerations). On the other hand, transactions occurring in order to compensate for differences between payments and receipts arising from a country’s autonomous transactions are called accommodating (offsetting) transactions. In effect, they are balancing transactions, which finance payments imbalances associated with autonomous transactions.

25. Since the balance of payments must always balance, how do balance of payments deficits or surpluses emerge?

Autonomous transactions are independent of the balance of payments in the sense that they are affected by factors outside the balance of payments statement.

26. If the price of euro falls from $1.250 to $1.180, is that depreciation or devaluation? Explain the difference.

Depreciation. The word “devaluation” is equivalent to depreciation but is commonly used to describe the lowering of the exchange rate in a fixed exchange rate system. The devaluation mechanism is similar to the depreciation mechanism under flexible exchange rates, that is it brings about a reduction in the price of exports and an increase in the price of imports.

27. How will the dollar/euro exchange rate be affected if American consumers consider that it is fashionable to own a bmw car?

If it is fashionable the BMW’s suppliers will increase export to America and it is depreciates the US dollars related to Euro. And Euro will appreciate.

28. Assume that the United States decides to adopt a fixed exchange rate system and pegs the dollar in relation to the euro. Trace out the possible effects on the US economy if (a) inflation is higher in the United States that in Europe, (b) the markets expect the dollar to depreciate.

In both cases US govt will be in need to pay back the difference between fixed price of dollar and a lower real price caused by the inflation or expectations.

29. What are the causes of globalization?

Convergence of Tastes. The tremendous improvement in telecommunications and transportation has lead to a strong cross-fertilization of cultures and convergence of tastes around the world.

Globalization in Production. Globalization has also occurred in the production of goods and services with the rapid rise of global corporations. These are companies that are run by an international team of managers, have research and production facilities in many countries, use parts and components from the cheapest source around the world, and sell their products, finance their operation, and are owned by stockholders throughout the world. In fact, more and more corporations operate today in the belief that their very survival requires that they become one of a handful of global corporations in their sector.

Globalization in Labor Markets. Globalization also strongly affects labor markets around the world. Work, previously done in the United States and other industrial countries, is now often done much more cheaply in developing countries. And this is the case not only for low-skilled assemblyline jobs but also for jobs requiring high computer and engineering skills. Most Americans have only now come to fully realize that there is a truly competitive labor force in the world today willing and able to do their job at a much lower cost. If anything, this trend is likely to accelerate in the future.