ACJC H2 External Macro Issues Lecture Notes

©ACJC Econs Dept/2024/External Macroeconomic Issues 1 ANGLO-CHINESE JUNIOR COLLEGE JC2 Economics H2 EXTERNAL MACROECONOMIC ISSUES Exchange Rate & Balance of Payments Section Contents Page 1 Overview of External Macroeconomic Aims and Problems 3 2. Exchange Rate 5 3.1 Exchange Rate Determination 5 2.2 Importance of Exchange Rate Stability 8 2.3 Impact of Exchange Rates on an Economy 9 3. 3.1 Balance of Payments: Definition and Components 11 3.2 Rationale for a Healthy Balance of Trade 15 3.3 Balance of Trade Deficit: Causes 16 3.4 Balance of Trade Deficit: Consequences 18 3.5 Balance of Trade Deficit: Desirability 20 3.6 Capital and Financial Account Deficit/Surplus: Causes 21 Learning Reflection 23 Annex: Balance of Trade Surplus: Consequences 24 References: 1. Principles of Economics: Case, Fair & Oster, 11th edition, chapter 35 2. Principles of Economics, Asian Edition: Mankiw, Quah & Wilson, chapter 31 3. Economics: John Sloman & Alison Wilde, 7th edition, chapter 25

©ACJC Econs Dept/2024/External Macroeconomic Issues 2 UNIT SUMMARY Most countries trade with and have financial transactions with the rest of the world. With economies being open to trade and capital flows, no economy operates in a vacuum and economic events in one country can have significant repercussions on the economies of other countries. Recall that t he strength of a country’s aggregate demand (AD) is not only dependent on consumption, investment and government expenditure on domestic goods & services, but also on exports of both goods and services. Apart from international trade, capital and financial flows between countries also have a major impact on the performance of an economy. The global economic inter -connectedness makes countries vulnerable to economic volatilities, particularly for the highly open economy of Singapore. This unit examines the relationship between a country’s balance of payment and its macroeconomic aims. It is essential to examine a country’s balance of payment because macroeconomic issues arise due to a confluence of internal and external factors many of which are often interrelated. The complexity and relatedness of domestic and external macroeconomic problems makes them difficult to solve and policy decisions will also involve hard choices and constraints. The choice of economic policies adopted by governments will depend on their economic priorities and the economic characteristics of their countries. LEARNING OUTCOMES: Students will have an understanding of the following: • Determinants of a country’s exchange rate • Current, capital & financial accounts of Singapore balance of payments • Causes of balance of trade (BOT) disequilibrium • Role of foreign direct investment (FDI) and its impact on the Singap