Economics: Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates

The country that attracts the net inflow of foreign capital tends to have a current account deficit. America is one example. Generally, the trade deficit (surplus) must be offset by the capital account surplus (deficit). In other words, the current account deficit means the capital surplus surplus. This relationship suggests that the trade surplus is equal to the sum of public savings and private savings. A country can save enough money to invest in factories and equipment (I). A country with a trade deficit must depend on foreign capital to raise investment funds (capital surplus). This time we will analyze the impact of exchange rate on trade and capital flows. Flexible Approach This approach highlights that price fluctuations are a factor in determining the national balance of payments and exchange rates. Exchange rates are an important price in the economy. Domestic goods will be relatively cheap if the currency of a country goes down, but overseas markets will be relatively expensive in the world market. Therefore, we expect exports to increase and imports to decrease. The flexible approach takes into account the import / export response to changes in the value of the country's currency. For example, if the resilience of import demand is very high, depreciation of the local currency will result in an imbalanced decrease in imports from that country. The condition of Marshall-Lerner points out that depreciation of the local currency can improve the balance of payments of the country only if the sum of the elasticity of export demand and the elasticity of import demand exceeds the same. J curve is an observed phenomenon. What is being observed is that after the depreciation the country's balance of payments will worsen before it improves. This is due to the fact that the amount of imports and exports has hardly changed in the short term, the price effect is dominant, and the current account balance is deteriorating. Absorption method This method emphasizes the fluctuation of real domestic income, assuming price is constant. Therefore, the absorption method is the actual income theory of the balance of payments. Absorption refers to the total amount of goods and services removed from the domestic market. In other words, absorption is equal to the sum of consumption and investment. Whether the depreciation of currency can improve the current account (current account) depends on the national income and the impact on domestic expenditure (absorption).

The exchange rate is the price at which the currency of one country is traded in another country on the foreign exchange market. This ratio varies from country to country and depends on many economic variables, mainly the general equilibrium and imbalance of the economy, financial and fiscal policies, budget situation, international policy, national situation and development. The situation of the world, the economy compared with major countries, the purchasing power of money, other internal and external factors

Robert Mundell is a Canadian economist who won the Nobel economics award in 1999. Because he analyzed monetary policy and fiscal policy under different exchange rates and analyzed the best currency field. Basically, this guy lives and sucks the world of currency exchange. When Canada decided to change its exchange rate in the 1960s, he was fascinated by the world. In order to study the influence of floating exchange rate, he proposed a model of exchange rate of Mundell-Fleming in collaboration with Marcus Fleming. The model's theorem depends on the so-called impossible impossibility key to the Trinity. Impossibility Trinity shows that there are three main ways for the state to deal with financial conditions, whether through free capital flows, fixed exchange rates, or monetary policy independence I will.