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Balance of Payments Analysis

Balance of Payments Analysis. Antony Mueller University Caxias do Sul (UCS) and The Continental Economics Institute www. continentaleconomics.com. Basic Structure of BP. Current Account Capital and Financial Account Net Errors and Omission = Overall Balance Change of Reserves

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Balance of Payments Analysis

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  1. Balance of Payments Analysis Antony Mueller University Caxias do Sul (UCS) and The Continental Economics Institute www. continentaleconomics.com

  2. Basic Structure of BP • Current Account • Capital and Financial Account • Net Errors and Omission • = Overall Balance • Change of Reserves • BP = CA + CFA + NEO + dR

  3. The Current Account • Current Account: • Trade • = Trade Balance • + Services • = Balance on Goods and Services • + Income • = Balance on Goods, Serv. & Income • + Transfers • = Current Account Balance

  4. Capital and Financial Account • Capital • Direct Investment • Portfolio Investment • Equity Securities/Debt Securities • Financial Derivatives • Other Investment • Monetary Authorities/Government/Banks

  5. A Simplified Scheme • With Transfers = 0 • Current Account becomes NX • Capital and Financial Account CF • Net Errors and Omissions = 0 • Change of reserves dR = 0 • BP = NX + CF = 0

  6. BP = NX + CF • NX = EX – IM • CF = CIM + CEX • BP = NX + CF = 0 • NX = - CF • - NX = + CF • EX < IM • CIM > CEX

  7. Reserves • dR = - dR’ • BP = NX + CF + dR = 0 • NX + CF = - dR • With CF = 0 • and NX < 0 • R must fall • - NX = dR

  8. Financial Crisis • With R falling below critical level, country risks default • EX – IM + CIM – CEX • P-, M-, e-, i+, C-, G-, I-, TA+, w-, • Financial crisis becomes economic crisis, • Economic crisis becomes social crisis • Social crisis becomes political crisis • Risk of economic decline

  9. Open Economy Macroeconomics Framework • Y = C + IPR + G + NX • Y = C + SPR + TA • C + IPR + G + NX = C + SPR + TA • (EX – IM) = (SPR – IPR) + (TA – G) • up down up down up down • Reduce G, devalue e, raise interest rate i • Side effects: w, IPR, TA, EX • Main burden falls on IM

  10. Preventing Financial Crises • Control money supply • Effect on prices (P), interest rate (i), and exchange rate (e) • Control government expenditures • Government Savings (TA – G) • Install Effective system of taxation • Competitiveness (Property Rights, Innovation, Regulation)

  11. External Position and Savings • SPR = private savings • (TA – G) = public savings (SGOV) • (SPR + SGOV) = SNAT (national savings) • NX = (SPR – IPR) + (TA – G) • NX + I = SPR + SGOV • NX + I = SNAT • S = NX + I

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