3. Balance of Payments - Exports (X) & Imports (M)
B of P = PxX – PmM
Px - vector of prices of exports
Pm - vector of prices of imports
Surplus = excess of exports over imports
Deficit = excess of imports over exports
… effect of exchange rates on BoP.
4. Domestic Absorption (A) = The national expenditures on both home-produced goods and imports.
- Not equal to B of P...
If A>GDP => trade deficit
If A<GDP => trade surplus
- How does a nation pay for domestic consumption (absorption) above and beyond GDP? => Draw down domestic savings and/or borrow from abroad (increase external debt).