International Trade and Finance

1. International Trade and Finance PPTs series 4 Econ 455

2. List of Contents • Part II Finance • The Balance of Payments • a) Concept and Structure of BoP • b) BoP and GDP • c) BoP goals • 2. Foreign exchange • a) Exchange rates and Markets • b) Exchange rate Mechanics • c) Exchange Rate Policies • 3: Exchange Regimes • a) Gold Standard • b) The Bretton Woods System • c) Extansions • d) Controversies • 4. Agents and their Activities • 5. Selected Exchange Rate Theories Introduction Part I Trade 1. Theories of Trade a) Motives for Trade b) Absolute Ádvantage c) Comparative Advantage d) Extensions 2. Barriers to Trade a) Non.tariffary Barriers b)Tariffs c) Quotas d) Subsidies Econ 455

3. Part II Finance1. The Balance of Payments Econ 455

4. Motive for a Balance of Payments • International transactions affect: • Production • Employment • Price level • Interest rates • Etc. Econ 455

5. Somer popular errors: „The German balance on current account shows an impressive surplus, but this should not lead you to the wrong conclusion aboutGermany‘s economic situation; just consider the alarming net capital exports!“ The US should do something about its Balance of Payments deficit Germans are living beyond their means, they should tighten their belts Econ 455

6. The balance of payments is the • Systematic record • of all economic transactions • between residents ond non-residents • during a time period Econ 455

7. Balance of payments sorts transactions in its sub-balances: Trade Balance Services Balance Income Balance Current Transfers Balance Capital Balance Reserve Balance Property transfers Errors and Omissions Balance on Current account Balance of Payments Balance on Capital Account Econ 455

8. Trade Balance: • Export (credit) and import (debet) of merchandise: • Raw materials, • Agricultural products • Food • Clothing, • Machines, • Automobiles, • Pharmaceuticals, • Natural gas, • Crude oil and derivatives, • Etc. Econ 455

9. Services balance • Export (credit) and import (debit) of non-tangible goods • Travel, • Transport, • Insurance, • Bank service, • Trade fairs, • Licences, • etc Econ 455

10. IncomeBalance • Receipts (credit) and payments (debit) of incomes • Salaries • Wages, • Interest, • Dividends, • Profits, • Etc Econ 455

11. CurrentTransfers • Transfers received (credit) or made (debit) • Pensions, • Private remittances • Contributions to International organizations Econ 455

12. Capital Balance • Capital exports = Acquisition of foreign assets and reduction of • foreign liabilities (debit) and • Capital imports = Entering foreign liabilities and reduction of • Foreign assets (credit). • Direct investment, • Portfolio investment, • Bank loans • Borrowing, lending, • Delayed payment • Cross border payments Econ 455

13. Reserve Balance • Increase (debit) or decrease (credit) of international reserves held by the central monetary authority, consisting of • Gold, • Foreign exchange, • Reserve Position within the IMF • - deposits of national currency by demand of the IMF • - Special drawing rights Econ 455

14. Every credit entry (+) will be accompanied by a debet entry (-) Example:Export 5 Mio Trade Balance Export 5 Mio Property Transfer Capital Balance Trade Balance Reserve Balance Import 5 Mio Gift 5 Mio IOU 5 Mio Res 5 Mio Econ 455

15. Consequence: „A balance of payments never shows a deficit nor a surplus“ All sub-balances will add up to zero Econ 455

16. Balance of Payments for Germany 2012 (in Blln EUR) Econ 455

17. Simplifications and Clarifications Reserves are held by the central bank and constitute a foreign asset. Their increase ( sign „-“) can be interpreted as a capital export, their decrease (sign „+“ ) as capital import. Errors and omissions are related to changes in the terms of payment and are rightfully integrated into the Capital Account Property transfers are insignificant and will be ignored in the following Econ 455

18. Some Balance of Payments mechanics (1) Abbreviations: Balance on Current account: A Capital Balance: CB Reserve Balance: R Capital Account: K A + CB + R = 0 CB + R = K A + K = 0 or A = - K A surplus in the balance on current account (A >0) is always offset by net captal exports (K<0) A deficit in the balance on current account (A<0) Is always offset by net capital imports Econ 455

19. Some Balance of Payments mechanics (2) More Abbreviations: Y = Domestic Product E = Domestic expenditure (National Income) C = Consumption I = Net Investment G= Government Expenditure A= Balance on current account Y = C+I+G+A E = C+I+G therefore Y = E+A When Y > E  A>0 and K<0 When Y < E  A<0 and K>0 A surplus in the balance on curent account ensuing net capital exports is the consequence of domestic expenditure falling Short of domestic production Econ 455

20. The political issue: Foreign balance as a political goal Foreign Balance is achieved when: The current account is in balance The current account plus the capital balance are in balance Reserves do not change Autonomous transactions are in balance Autonomous transactions are in balance in absence of induced political activities Econ 455