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Week 14 · Lecture outline

Week 14 — Lecture Outline · Open-Economy Macro: Exchange Rates & the Balance of Payments

Principles of Macroeconomics · ECON 2 Fall 2026 · Prof. Ashford Fictional sample

Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objective 8 — the inflation–unemployment tradeoff & the quantity theory; open-economy tools — comparative advantage, the trade balance, exchange rates, the balance of payments · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see the verified box in §4 and §5).

Week at a glance
Big question When a currency's exchange rate moves, who gets cheaper prices, who gets pricier prices, and what happens to net exports?
By week's end students can (1) correctly identify appreciation vs. depreciation from a rate change without flipping the direction; (2) trace how a currency move changes the price a foreign buyer pays for a U.S. export and the price a U.S. buyer pays for a foreign import; (3) combine both price effects into a net-exports (NX) conclusion; (4) describe the FX market qualitatively; (5) state the balance-of-payments mirror (current account ⇔ financial account).
Key vocabulary exchange rate, appreciation, depreciation, foreign-exchange (FX) market, net exports (NX), the current account, the financial account, the balance-of-payments mirror
Materials whiteboard; the Week-14 readings/links; Desmos or a spreadsheet for the currency-conversion table; an approved chatbot
Timing note 8 segments ≈ 150 min across two sessions. Trim Segment 7 (interaction) if short on time.

Segment 1 — HOOK: "The same car, two different price tags" (12 min)

Open with a scenario: "Imagine a $25,000 American-made car. Last year it cost a Japanese buyer ¥2,500,000. This year, without the factory changing a single thing about the car, it costs that same Japanese buyer ¥3,000,000. Nothing about the car changed. What changed?" Let guesses land — someone will say "the price went up," which is true but incomplete. The answer: the exchange rate moved. The car's dollar price never budged; what changed is how many yen one dollar buys.

Draw the line the whole lecture rests on: an exchange rate is a price — the price of one currency stated in terms of another. Just like any other price, it can rise or fall, and just like any other price change, it creates winners and losers on both sides of the transaction. Today's job: learn to read which way it moved, and predict exactly who wins and who loses.

Segment 2 — PLAIN-LANGUAGE IDEA: appreciation vs. depreciation (18 min)

Teach it in one sentence first, then formalize:

A currency APPRECIATES when it buys MORE of another currency than before; it DEPRECIATES when it buys LESS.

The exact anchor scenario (write it on the board, do not skip a step):

Suppose $1 = ¥100 last year. This year, $1 = ¥120.

Walk it through out loud: "Last year, one dollar bought 100 yen. This year, that SAME one dollar buys 120 yen — MORE yen than before. So the dollar got stronger — it APPRECIATED." Flip the frame to be sure it sticks: "From the yen's side, it now takes MORE yen (120 instead of 100) to buy that same one dollar — so the yen is weaker — the yen DEPRECIATED." Appreciation of one currency is always the mirror image of depreciation of the other — they are the same event, described from two sides.

Memory hook (the one to give students verbatim): "MORE foreign currency per dollar = the dollar got stronger = APPRECIATION. FEWER = the dollar got weaker = DEPRECIATION." Do NOT let "appreciation sounds nice, so it must mean 'good news'" sneak in — that's exactly the trap Segment 5's discussion prep will dismantle. Appreciation and depreciation are directions, not verdicts.

Quick classification drill (thumbs up/down, no math yet): "$1 = ¥100 → $1 = ¥90 — did the dollar appreciate or depreciate?" (Depreciate — fewer yen per dollar.) "$1 = €0.80 → $1 = €1.00 — appreciate or depreciate?" (Appreciate — more euro per dollar.)

Segment 3 — WORKED EXAMPLE #1: the export/import price chain, digit by digit (25 min)

Set it up on the board and do every step out loud — this is the week's load-bearing calculation.

Continue the anchor: $1 = ¥100 → $1 = ¥120 (the dollar APPRECIATED). Two goods, both directions of trade:

(A) A U.S. EXPORT — the $25,000 American car, priced for a Japanese buyer:
- At $1 = ¥100: $25,000 × 100 = ¥2,500,000.
- At $1 = ¥120: $25,000 × 120 = ¥3,000,000.
- ¥3,000,000 is MORE than ¥2,500,000 — the car got PRICIER for the Japanese buyer, even though its dollar price never changed. (Say it in words: "the dollar's appreciation makes American goods more expensive to foreign buyers, so U.S. exports tend to FALL.")

(B) A JAPANESE IMPORT — the ¥1,200,000 machine, priced for a U.S. buyer:
- At $1 = ¥100: ¥1,200,000 ÷ 100 = $12,000.
- At $1 = ¥120: ¥1,200,000 ÷ 120 = $10,000.
- $10,000 is LESS than $12,000 — the machine got CHEAPER for the U.S. buyer. (Say it in words: "the dollar's appreciation makes foreign goods cheaper to U.S. buyers, so U.S. imports tend to RISE.")

(C) COMBINE INTO THE NX CONCLUSION: exports fall (fewer yen-denominated sales of American cars) and imports rise (Americans buy more of the now-cheaper Japanese machines) → net exports (NX = exports − imports) FALLS.

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

  • $1 = ¥100 → $1 = ¥120: ¥120 > ¥100, so the dollar appreciated.
  • $25,000 car: ¥2,500,000 → ¥3,000,000 (pricier abroad → exports fall).
  • ¥1,200,000 machine: $12,000 → $10,000 (cheaper at home → imports rise).
  • Conclusion: exports↓, imports↑ → NX↓. (Depreciation reverses every one of these arrows — see the Instructor FAQ.)

Say it in words (the SLO-A habit): "An appreciating dollar is a mixed blessing for the trade balance — it's good news for anyone buying imports, and bad news for anyone selling exports abroad." Flag this sentence — it is the seed of today's discussion.

Segment 4 — THE FOREIGN-EXCHANGE (FX) MARKET, QUALITATIVELY (18 min)

The exchange rate isn't set by decree — it's a price determined in a market, the foreign-exchange (FX) market, where currencies are bought and sold against each other, much like any other market has a price determined by the forces that push demand and supply. Describe qualitatively (no equations, no shifting-curve diagram required this week — that machinery is optional enrichment, not tested):

  • Demand for dollars comes from foreigners who want to buy U.S. exports, invest in U.S. assets, or hold dollars — the more of this demand, the more the dollar tends to appreciate.
  • Supply of dollars comes from Americans who want to buy foreign goods, invest abroad, or hold foreign currency — more of this tends to push the dollar toward depreciation.
  • Real-world drivers named factually, one line each: relative interest rates (higher U.S. rates tend to attract foreign investment, raising dollar demand), relative inflation (a currency with persistently higher inflation tends to depreciate over time), and relative income/growth (faster U.S. growth can pull in more imports, raising the supply of dollars). (These are qualitative drivers for this course — no formal interest-parity condition is required at the principles level.)

Misconception to kill: a government does not simply "set" a floating exchange rate any more than a government sets the price of wheat — in market-determined (floating) exchange-rate systems, the rate emerges from the push and pull of buyers and sellers of each currency, the same market logic from Week 1's supply-and-demand instincts, now applied to currencies themselves.

Segment 5 — THE BALANCE OF PAYMENTS: THE CA/FA MIRROR (15 min)

Zoom out from one exchange rate to the whole country's international transactions, tracked in the balance of payments. At the principles level, two pieces matter:

  • The current account (CA) — mostly net exports (exports minus imports of goods and services), plus some smaller income and transfer flows.
  • The financial account (FA) — the flow of financial investment into and out of the country (foreigners buying U.S. assets vs. Americans buying foreign assets).

The mirror (load-bearing, not both-sided — this is settled accounting, like a household's income statement and balance sheet always reconciling): at the principles level, a current-account deficit is financed by an offsetting financial-account surplus, and vice versa — CA and FA move as mirror images.

✅ VERIFIED NUMBER (pre-computed; do not recompute live)

If a country's current-account balance is −50 (a $50B current-account deficit — it is buying more from the rest of the world than it is selling), its financial-account balance is +50 (a $50B financial-account surplus — the rest of the world is investing that same $50B back into the country's assets). CA + FA = 0 at this principles level of description.

Say it plainly: a country that runs a trade deficit is not "losing money that disappears" — the dollars that flow out to pay for imports flow back in as foreign investment in that country's assets (stocks, bonds, real estate, business ownership). Neither side of the mirror is described here as automatically "good" or "bad" — it is an accounting identity, not a policy verdict.

Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (18 min)

Live demo (spreadsheet or simple mental math): build a small currency-conversion table live — put $1 = ¥100 in one row and $1 = ¥120 in the next, then convert the $25,000 car and the ¥1,200,000 machine in both rows side by side so the class watches the two numbers move in opposite directions (car price in yen goes UP, machine price in dollars goes DOWN) from the very SAME currency move.

AI-critique moment (do this with the class): Ask an approved chatbot: "If the exchange rate moves from $1 = ¥100 to $1 = ¥120, did the dollar appreciate or depreciate? What happens to the price of a $25,000 American car in Japan, and what happens to net exports?" Then audit it together: the right answers are appreciated (120 > 100 — more yen per dollar), the car becomes pricier in Japan (¥3,000,000, up from ¥2,500,000), and net exports fall. Chatbots frequently flip the appreciation/depreciation label (calling ¥120-per-dollar a "weaker" dollar), or get the export price direction backwards (saying the car gets cheaper abroad), or skip straight to a policy verdict ("so a strong dollar is bad") without doing the arithmetic. Make the class catch each error and re-derive the correct chain. The habit all term: the tool drafts, you judge.

Segment 7 — INTERACTION: mini-debate warm-up (12 min)

Pose: "A news headline says, 'The dollar just hit a two-year high.' One of your classmates says that's obviously great news for the U.S. economy. Is it obviously great news for everyone?" Let pairs argue for 4 minutes, then share out. Target answer: no single verdict — a stronger dollar is genuinely good news for some (importers, travelers abroad, anyone worried about imported inflation) and genuinely tough news for others (U.S. exporters and the manufacturing workers who make export goods) at the very same time, from the very same currency move. This is the direct setup for Discussion 14 — do not let the room settle on one "right" answer today; that's the discussion's job to explore evenhandedly.

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (12 min)

  • Callback: every example today shared one engine — an exchange rate is a price, and once you know which way it moved, you can trace exactly who pays more and who pays less on both sides of the trade — with no verdict required.
  • Tease next week: "We've now built almost every tool in this course — measurement, growth, AD–AS, fiscal policy, money and the Fed, the Phillips curve, trade, and exchange rates. Next week we bring the two great schools of macroeconomic thought face to face and ask: when the tools disagree about what to do, how do economists reason it through?"
  • The week's work: Lecture Tutorial (appreciation/depreciation → the export/import price chain → the FX market → the CA/FA mirror), Practice (6 reps), Quiz 14, Discussion 14, Assignment 14, and Workshop 14 ("Exchange Rates & Net Exports" — convert two goods both directions at both rates and state the NX conclusion).

Instructor FAQ — common stumbles

  • "$1 = ¥120 sounds like a bigger number, so the dollar must be depreciating, right?" No — this is the #1 flip. Read it as "how much yen does one dollar buy": 120 is MORE than 100, so the dollar buys more, so the dollar is stronger — it appreciated. The size of the yen number and the strength of the dollar move in the SAME direction (bigger yen-per-dollar number = stronger dollar), which is exactly why this trips people up when they expect "bigger number = weaker."
  • "If the dollar appreciates, doesn't that just make everything better for the U.S.?" No — that's the trap this week's discussion is built to dismantle. Appreciation makes imports cheaper and travel abroad cheaper (good for consumers and importers) but makes U.S. exports pricier abroad (tough for exporters and export-sector workers) — genuinely a trade-off, not a one-sided win.
  • "Does the government set the exchange rate?" Not in a market-determined (floating) system — it emerges from the push and pull of currency buyers and sellers in the FX market, the same supply-and-demand logic from Week 1, applied to currencies.
  • "A trade deficit means the country is losing — where does the money go?" It doesn't vanish — dollars spent on imports flow back in as foreign investment (the financial account). At the principles level, CA and FA are mirror images (CA + FA = 0) — this is an accounting fact, not a verdict on whether the deficit is "good" or "bad" policy.
  • "Depreciation just reverses appreciation, right?" Yes — every arrow flips: a depreciating dollar makes U.S. exports cheaper abroad (exports rise) and foreign imports pricier at home (imports fall), so NX rises. Keep straight which direction you're in before reading off the effects.

~ Prof. Ashford's edition · Fall 2026 · built with thecoursemaker.com