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External Sector . Econ 102 _2013. External Sector. How is a country linked with other countries in the global world? There are exchange of Goods and Services There are exchange of Assets What is different? We have Turkish Lira (TL), US has US dollars ($) and European Union has Euro(€).

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external sector

External Sector

Econ 102 _2013

external sector1
External Sector

How is a country linked with other countries in the global world?

  • There are exchange of Goods and Services
  • There are exchange of Assets

What is different?

We have Turkish Lira (TL), US has US dollars ($) and European Union has Euro(€)

foreign currency
Foreign currency
  • Exchange rate is the TL price of a foreign currency in Turkey.

Eg. 1 $= 2.08 TL (TL price of one dollar) or

0.48 $ = 1 TL ( dollar price of one TL)

  • If TL price of a $ increases, TL depreciates
  • (TL becomes less valuable compared to $)
exchange of goods and services
Exchange of Goods and Services
  • Exports are the goods that we sell (and foreign economies buy). Hence, it is a source of foreign exchange.

Exports= F( Yforeign, exchange rate)

  • Imports are the good that we buy (foreign sell to us). Hence we use foreign exchange to purchase imports

Imports= F( Ydomestic, exchange rate)

net exports
Net Exports
  • Net Exports = value of Exports- value of imports

Net Exports = F( Y domestic , Yforeign, exchange rate)

This is also called the Trade Balance

exchange of financial assets
Exchange of Financial Assets
  • We exchange Bonds, Shares, other assets.

Asset demand depends on relative returns, i.e. interest rates, hence investors compare

domestic interest rate < or > foreign interest rates

i< or > i*

asset demand
Asset demand
  • Example:

Turkish treasury TL bonds: i = 10%,

German treasury Euro bonds: i* = 8%

Which one will the investors prefer to buy?

asset demand1
Asset demand
  • Example:

Turkish treasury TL bonds: i = 10%,

German treasury Euro bonds: i* = 8%

Which one will the investors prefer?

What if during this period it is expected that e will increase by 5 %, that is TL depreciates by 5 %, will you still prefer to buy Turkish Bonds.?

asset demand2
Asset demand
  • Example:

Turkish treasury TL bonds: i = 10%,

German treasury Euro bonds: i* = 8%

Which one will the investors prefer?

iEURO = iTL - expected % change in e.

8% = 10 % - expected D % in e

how are the foreign transaction recorded
How are the foreign transaction recorded?
  • Balance of Payments: (ÖdemelerDengesi)

Accounting method of all monetary transactions, with double entry system. Every transaction is recorded in different parts of the Balance of Payments.

balance of payments
Balance of Payments
  • Current Account
  • Financial Account
  • Central Bank reserve positions
  • Errors and Omissions

All adds up to zero.

current account
Current Account
      • Exports of goods (+)
      • Imports of goods (-)
    • Balance of trade
      • Exports of services(+)
      • Imports of services(-)
    • Balance of services
      • Income received on investment (+)
      • Income payments on investment (-)
    • Net income on investment
    • Net transfers (+) (-)
  • Balance on current account
financial account
Financial Account
    • Increase in foreign holdings of assets in Turkey (+)
    • Increase in Turkey’s holding of assets in foreign countries (-)
  • Balance on Financial Account
capital account
Capital Account
  • Statistical Discrepancy
  • Balance of Payments
foreign exchange market
Foreign Exchange Market
  • Systems of Foreign Exchange:
  • Fixed Exchange Rate System: Central Bank determines the rate at which domestic currency is exchanged in to foreign currency.
  • Flexible Exchange Rate System: market determines the the rate at which domestic currency is exchanged in to foreign currency
foreign exchange market1
Foreign Exchange Market

TL price of foreign currency

Demand for foreign currency

Supply of Foreign Currency

Quantity of Foreign Currency

foreign exchange market2
Foreign Exchange Market

TL price of $

Demand for $

Supply of $

Quantity of $

the change in foreign exchange market equilibrium when turkish imports increase
The Change in Foreign Exchange Market Equilibrium when Turkish Imports increase

TL price of foreign currency

Demand for foreign currency

Supply of Foreign Currency

Quantity of Foreign Currency

The TL price of US dollar increases, i.e. TL depreciates

the change in foreign exchange market equilibrium when turkish residents purchase foreign bonds
The Change in Foreign Exchange Market Equilibrium when Turkish residents purchase Foreign Bonds

TL price of foreign currency

Demand for foreign currency

Supply of Foreign Currency

Quantity of Foreign Currency

The TL price of US dollar increases, i.e. TL depreciates