Thank you for the video🙏🏼. Please I’ll like to understand why the BP curve shifts when there is no capital mobility but does not shift when there is perfect capital mobility? Basically, why does the BP rotate with the degree of capital mobility?
Hi, thank you for the kind words. The formula for BP is: CA(S,Y,Yw)+K(i,iw)=0 If domestic currency depreciates (S up), we se that current account goes to into surplus (CA>0). However, now the equation is no longer equal to zero. For the new exchange rate we must have higher GDP or/and interest rate to compensate for the effect of depreciation. This is why BP shifts to the right every time there is a depreciation. In the video I said that it does not move, however, this concerned only drawing (like in the case of the LM curve under liquidity trap/zero lower bound). This shift in BP happens regardless of the degree of capital mobility. However, when we have perfect capital mobility the movement of BP to the right is not visible. With perfect capital mobility capital accounts completely dominates balance of payments. Therefore, there most be the same interest rate in the country and in the rest of the world regardless of the level of GDP and exchange rate. Consequently, BP is flat and when it moves to the right it does not change the location. Please let me know if this explains all you concerns. Best regards :)
thanks so much for the video, best wishes to you!!
Again, you are saving my exams tomorrow!
My pleasure :) Good luck!!!
You have spoken golden words, thank you from the heart
Thank you for the video🙏🏼. Please I’ll like to understand why the BP curve shifts when there is no capital mobility but does not shift when there is perfect capital mobility?
Basically, why does the BP rotate with the degree of capital mobility?
Hi, thank you for the kind words.
The formula for BP is:
CA(S,Y,Yw)+K(i,iw)=0
If domestic currency depreciates (S up), we se that current account goes to into surplus (CA>0). However, now the equation is no longer equal to zero. For the new exchange rate we must have higher GDP or/and interest rate to compensate for the effect of depreciation. This is why BP shifts to the right every time there is a depreciation. In the video I said that it does not move, however, this concerned only drawing (like in the case of the LM curve under liquidity trap/zero lower bound).
This shift in BP happens regardless of the degree of capital mobility. However, when we have perfect capital mobility the movement of BP to the right is not visible. With perfect capital mobility capital accounts completely dominates balance of payments. Therefore, there most be the same interest rate in the country and in the rest of the world regardless of the level of GDP and exchange rate. Consequently, BP is flat and when it moves to the right it does not change the location. Please let me know if this explains all you concerns. Best regards :)
@@lazarskiopencourses4059 This is amazing! Thank you so much. I had really struggled to understand this.
@@toluojutiku9585 our pleasure :)
14:45 I believe that if the income goes down, the CA increases, because the Import decreases?
But remember that when CA goes down Y goes down because CA is a part of the GDP
And what happens in fiscal contraction?
Hi, exactly the same things just in an opposite direction.
Thank you so much
Thank you so much
My pleasure :)