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ECO 3713 THE GLOBAL MACRO ECONOMY? Affects business Good business and policy decisions require an understanding of macroeconomic conditions *Big effects on stocks, retail, international sales When the dollar value depreciates, exports rise When the dollar appreciates, exports decline The ability to export is affected. A currency depreciation allows United States exporter to DROP their prices abroad which will thus INCREASE sales. If the dollar value is down, it is essentially cheaper to produce the goods in the United States. Start by looking at the Australian Dollar. They call the American Dollar the Greenback When the currency is strong, Investors want to convert their funds into the currency. That makes the currency APPRECIATE. Investment is high, the currency rises, BUT exports decrease. Australia has built an infrastructure where it profits off of commodity sales to China. They have a Triple A credit rating. They are considered a safe haven, which is a nice return for a low risk. However because of the strong Australian Dollar, they are losing jobs because demand for their products are not as high. An open economy is open to trade flows, and capital flows. Trade flows means the flows of goods and services So we are talking exports and imports Capital flows means flows of financing Home citizens can invest abroad and Foreigners can invest in the home economy *The openness to labor is the third field which is not studied. Let’s look at Countries with Open Economy Macroeconomics with the % of GDP exported. Belgium- 88% Thailand- 74% Germany- 45% Chile- 45% Korea-43% *For many smaller countries, international trade is crucial. We’ll go back to ECONOMIES OF SCALE. Where you produce more, it becomes cheaper to make. In the United States, international trade and investment are not AS crucial. But are growing in importance. In 1950 % of Exports in GDP was 4% whereas today it is somewhere between 10-14%. The best opportunities to export are in emerging economies. In emerging economies it is easier to imitate than invent. Think about who invents new technologies? International investments have also been growing in importance. There are two ways to increase investment exports. Either INVEST ABROAD, or PRODUCTION FACILITIES. The exchange rate is the price of one currency in terms of another currency. 1 UK POUND — 1 EMU — 1 US $ 1 UK POUND 1 .8786 .6339 1 EMU 1.1376 1 .7209 1 US $ 1.5779 1.3874 1 RECIPROCAL! How Exchange Rates Behave? Government can allow exchange rates to fluctuate with market forces (floating) or governments can intervene and hold them stable (fixed). Key issues In the absence of government intervention, what determines exchange rates? Investors determine value. View Full Document