Sat May 31st, 2008 at 07:16:27 AM EST
In the comments to my latest diary Where will Peak Oil hurt the most? I took a beating for using Foreign Exchange Reserves as a measure of the ability of a country to purchase oil in the open market in the event of a global oil crunch, thus cushioning the blow from such a shock. I was conceptualizing reserves as a stock that could be spent when apparently it's a side-effect of monetary policy and exchange-rate movements. What this illustrates is my tenuous grasp of international trade, the balance of payments, and the system of national accounts.
So, in the Socratic spirit, here are my questions:
- What are currency reserves? Where do they come from? Can they be spent? How do they differ in the fiat currency system from gold reserves back in the age of the gold standard?
- What is the relationship between currency reserves, exchange rates and the trade balance?
- What do the components of the balance of payments (current account, capital account and financial account) mean, and how do they change?
- Does one need to think about the balance of payments differently when considering a single-market area such as the EU, or a monetary union such as the Eurozone? Do individual US states have a balance of payments, too, and should they?
is an occasional series of questions posed in a Socratic effort to understand economics.