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The Balance of Payments and International Economic Linkages

The Balance of Payments and International Economic Linkages. Chapter 4. CHAPTER OVERVIEW. I. BALANCE-OF-PAYMENT CATEGORIES II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL III. COPING WITH CURRENT ACCOUNT DEFICITS. PART I. BALANCE-OF-PAYMENT CATEGORIES.

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The Balance of Payments and International Economic Linkages

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  1. The Balance of Payments and International Economic Linkages Chapter 4

  2. CHAPTER OVERVIEW • I. BALANCE-OF-PAYMENT CATEGORIES • II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • III. COPING WITH CURRENT ACCOUNT DEFICITS

  3. PART I.BALANCE-OF-PAYMENTCATEGORIES • A. THE BALANCE OF PAYMENTS (B-O-P) • 1. PURPOSE: • Measures all financial and economic transactions over • a specified period of time.

  4. BALANCE-OF-PAYMENTCATEGORIES • 2. Double-entry bookkeeping • a. Currency inflows = credits • (earn foreign exchange) • b. Currency outflows = debits • (expend foreign exchange)

  5. BALANCE-OF-PAYMENTCATEGORIES • 3. Three Major Accounts: • a. Current • b. Capital • c. Official Reserves • 4. Current Account • records net flow of goods, services, and unilateral transfers.

  6. BALANCE-OF-PAYMENTCATEGORIES • 5. Capital Account • a. Function: records public and • private investment and lending. • b. Inflows = credits • c. Outflows = debits • d. Transactions classified as • 1.) portfolio • 2.) direct • 3.) short term

  7. BALANCE-OF-PAYMENTCATEGORIES • 6. Official Reserves Account • a. Function: • 1.) measures changes in • international reserves • owned by central banks. • 2.) reflects surplus/deficit of • a.) current account • b.) capital account

  8. BALANCE-OF-PAYMENTCATEGORIES • b. Reserves consist of • 1.) gold • 2.) convertible securities • 7. Net Effects: • a. Sum of all transactions must • be zero: • 1.) current account • 2.) capital account • 3.) official reserves

  9. BALANCE-OF-PAYMENTCATEGORIES • 8. Balance-of-payment Measures • a. Definitions: • 1.) Basic Balance • a.) consists of current • account and long-term • capital flows. • b.) emphasizes long-term • trends. • c.) excludes short-term • capital flows that heavily • depend on temporary • factors.

  10. BALANCE-OF-PAYMENTCATEGORIES • 2.) Official Reserve Transactions • Balance • - measures adjustments needed • by official reserves.

  11. T.C. BOP • ODEMELER DENGESI (milyon ABD dolari) Ocak-Temmuz 2004 • Carl Ilemler Dengesi -10025 • Dis Ticaret Dengesi -19419 Ihracat 34406 Ithalat -53825 • Sermaye ve Finans Hesaplari 8695 Finans Hesabi (Resmi Rezerv hariç) 8235 • Resmi Rezervlerdeki Degisim 460 • Kaynak: TCMB.

  12. PART II.THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • II. LINKS FROM INTERNATIONAL TO • DOMESTIC FLOWS • A. Introduction: Global Linkages • set of basic macroeconomic identities links: • domestic spending and production • to • current and capital accounts

  13. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • B. Domestic Savings and Investment • and the Capital Account • 1. National Income Accounting • a. National Income (NI) is either spent (C) or saved (S) • NI = C + S (4.1)

  14. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • b. National spending (NS) is • divided into personal spending (C) • and investment (I) • NS = C + I (4.2) • c. Subtracting (4.2) - (4.1) • NI - NS = S - I (4.3) • If NI >NS, S > I which implies • that surplus capital spent overseas.

  15. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • d. In a freely-floating system, • excess saving = the capital account balance • e. Implications: • 1. A nation which produces more • than it spends has a net capital • outflow producing a capital • account deficit.

  16. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • 2. A nation which spends more than it produces has a net capital inflow producing a capital account surplus. • 3. A healthy economy will tend to • run a current account deficit.

  17. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • C. THE LINK BETWEEN THE CURRENT AND CAPITAL ACCOUNTS • 1. Beginning identity • NI - NS = X - M (4.4) • where X = exports • M = imports • X-M=current account balance (CA)

  18. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • 2. Combining (4.3) + (4.4) • S - I = X - M (4.5) • 3. If S - I = Net Foreign Investment (NFI) • NFI = X - M (4.6)

  19. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • 4. Implications: • a. If CA is in surplus, the nation must be a net exporter of capital. • b. If CA is a deficit, the nation is a • major capital importer. • c. When NS > NI, the excess must • be acquired through foreign trade.

  20. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • d. Solutions for Improving CA deficits: • 1.) Raise national income (output) • relative to domestic investment (I). • 2.) Increase (S) relative to domestic investment (I).

  21. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • D. GOVERNMENT BUDGETS AND • CURRENT ACCOUNT DEFICITS • 1. CURRENT ACCOUNT BALANCE • CA = Saving Surplus - Gov’t budget • deficit

  22. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • 2. CA Deficit means • the nation is not saving enough to finance (I) and the deficit. • 3. CA Surplus means • the nation is saving more than needed to finance its (I) and deficit.

  23. PART III.COPING WITH THE CURRENT ACCOUNT DEFICIT • I. POSSIBLE SOLUTIONS UNLIKELY TO • WORK: • A. Currency Depreciation • B. Protectionism • II. CURRENCY DEPRECIATION • A. U.S. Experience: Does not improve the trade deficit.

  24. COPING WITH THE CURRENT ACCOUNT DEFICIT • B. Depreciations ineffective because • 1. It takes time to affect trade. • 2. J-Curve Effect • states that a decline in currency • value will initially worsen the • deficit before improvement.

  25. COPING WITH THE CURRENT ACCOUNT DEFICIT • III. PROTECTIONISM • A. Trade Barriers used: • 1. Tariffs • 2. Quotas • B. Results: • Most likely will reduce both X and M.

  26. COPING WITH THE CURRENT ACCOUNT DEFICIT • C. FOREIGN OWNERSHIP • one protectionist solution would place limits on or eliminate foreign ownership leading to capital inflows. • D. STIMULATE NATIONAL SAVING • change the tax regulations and rates.

  27. COPING WITH THE CURRENT ACCOUNT DEFICIT • III. SUMMARY: CURRENT-ACCOUNT • DEFICITS • - neither bad nor good inherently • 1. Since one country’s exports are • another’s imports, it is not possible • for all to run a surplus • 2. Deficits may be a solution to the problem of different national propensities to save and invest.

  28. US BOP Data • http://www.bea.doc.gov/ • briefrm/tables/ebr10.htm

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