INTERNATIONAL ECONOMICS

WORKS FOR THE RETURN TO EQUILIBRIUM AFTER THE INITIAL EQUILIBRIUM HAS BEEN DISRUPTED. THERE ARE TWO PROCESSES TO CREATE THIS MECHANISM: AUTOMATIC (ECONOMIC PROCESS) AND DISCRETIONARY (GOVERNMENT PROCESS)

A MECHANISM THAT WORKS TO RETURN A BOP TO EQUILIBRIUMAUTOMATICALLY THROUGH THE ADJUSTMENTS IN ECONOMIC VARIBALES. THESE VARIBLES INCLUDE: PRICES, I RATES, AND INCOME.

• A CLASSIC BOP ADJUSTMENT SYSTEM CHARCTERIZED BY THREE CONDITIONS:
• 1. EACH MEMBER NATIONS MONEY SUPPLY CONSISTED OF OLD PAPER MONEY BACKED BY GOLD
• 2. EACH MEMBER NATION DEFINED THE OFFICIAL PRICE OF GOLD IN TERMS OF ITS NATIONAL CURRENCYAND WAS PREPARED TO BUY AND SELL GOLD AT THAT PRICE
• 3. FREE IMPORT AND EXPORT OF GOLD WERE PERMITTED BY MEMBER NATIONS. UNDER THESE CONDITIONS, A NATIONS MONEY SUPPLY WAS DIRECTLY TIED TO ITS BOP'S.

DEALS WITH INCOME EFFECTS OF DEPRECIATION THE IMPLICATION IS THAT A DECREASE IN DOMESTIC EXPENDITURE RELATIVE TO INCOME MUST OCCUR FOR DEPRECIATION TO PROMOTE TRADE EQUILIBRIUM.

EMPHASIZES THE RELATIVE PRICE EFFECTS OF DEPRECIATION AND SUGGESTS THAT DEPRECIATION WORKS BEST WHEN DEMAND ELASTICITES ARE HIGH.

IN THE VERY SHORT RUN A CURRENCY DEPRECIATION WILL LEAD TO A WORSENING OF A NATIONS TRADE BALANCE.BUT AS TIME PASSES, THE TRADE BALANCE WILL LIKELY IMPROVE.

• WHEN THE FREE MARKET FORCES OF SUPPLY AND DEMAND ARE ALLOWED TO DETERMINE THE EXCHANGE VALUE OF A CURRENCY. There are almost no cleanly floating Western currencies, i.e.,
• currencies that are not supported one way or another through Intervention
• by central banks.

AN OFFICIAL CHANGE IN A CURRENCYS PAR VALUE WHICH CAUSES THE CURRENCYS EXCHANGE VALUE TO DEPRECIATE.

A CONDITION UNDER A MANAGED FLOATING SYSTEM WHEN FREE MARKET FORCES OF SUPPLY AND DEMAND ARE NOT ALLOWED TO ACHEIEVE THEIR EQUILBRATING ROLE; COUNTRIES MAY MANAGE THEIR EXCHANGE RATES TO IMPROVE THE COMPETITIVENESSS OF THEIR PRODUCERS.

AN OFFICIAL CHANGE IN A CURRENCYS PAR VALUE, WHICH CAUSES THE CURRENCYS EXCHANGE VALUE TO INCREASE.