2. Capital account

Foreign purchases of assets

Purchases of assets abroad

Balance on capital account

Capital account summarizes the flows of payments from the purchase or sale of real or financial assets.

3. Official reserve account

-the quantity of foreign currencies the central bank hold

-the reserves can be drawn on to make up any net deficit in the combined current and capital accounts

A drawing of official reserves measures a balance of payment deficit

A building up of official reserves measures a balance of payment surplus

34. Exchange rate: types and determinats

Types:

-a flexible or floating exchange rate system

The rates at which national currencies are exchanged for one another are determined by demand and supply and in which no government intervention occurs.

-fixed exchange rate system

Governments determine the rates at which currencies are exchanged and make necessary adjustments in their economies to ensure that these rate countinue

Determinates of ex. Rates:

1. Changes in tastes

2. Relative income change

3. Price level changes

4. Relative interest rate

5. Speculation

35. International exchange-rate systems

1. The golden standard: fixed exchanged rates (1879-1934)

Nations must:

-define its currency in term of a quantity of gold

-maintain a fixed relationship between its stock of gold and its money supply

-allow gold to be freely exported and imported

2. The bretton wood system (1944-1971)

New system soughs to capture the advantages of gold standard avoiding its disadvantages

3. The managed float system

Exchange rate among major currencies is free to float to their equilibrium market levels, but nations occasionally intervene in the foreign exchange market to stabilize market exchange rates.