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The balance of payments

The balance of payments. Lecture outline. The notion of the balance of payments The construction of the balance of payments The balance of payments analysis The balance of payments equilibrium. The notion of the balance of payments.

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The balance of payments

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  1. The balance of payments International finance 120181-1165

  2. Lecture outline • The notion of the balance of payments • The construction of the balance of payments • The balance of payments analysis • The balance of payments equilibrium International finance 120181-1165

  3. The notion of the balance of payments • Transactions schedule between residents and nonresidents within a specified period of time International finance 120181-1165

  4. BP and national income accounting • Y=C+I+G+EX-IM • CA=EX-IM • CA=Y- (C+I+G) International finance 120181-1165

  5. BP and national income accounting • Autarky • S=Y-C-G • Y=C+I+G • S=I • An open economy • S=I+CA International finance 120181-1165

  6. BP and national income accounting • An open economy may use its savings to build its own capital or to purchase foreign assets • Investments in an open economy may be financed through foreign savings International finance 120181-1165

  7. BP and national income accounting • Private savings Sp=Y-T-C • Governement savings Sg=T-G so • S=Sp+Sg=I+CA • Sp=I+CA-Sg=I+CA-(T-G)=I+CA+(G-T) International finance 120181-1165

  8. The construction of the BP • Debit entries eg. the purchase of foreign goods  payment goes to foreign subjects • Credit entries eg. exports of domestic goods  payment goes to domestic subjects International finance 120181-1165

  9. The construction of the BP • Current account • Capital and financial account International finance 120181-1165

  10. The construction of the BP • A German consumer imports American goods – a credit entry in the US CA • An American company buys a Japanese factory- debit entry in the US financial account International finance 120181-1165

  11. The current account • Goods • Services • Income • Current transfers International finance 120181-1165

  12. The capital account • Transactions which trigger the transfer of assets between countries • Eg. some of the EU structural funds or international debt remission International finance 120181-1165

  13. The financial account • Transactions related to the purchase or selling of financial assets • Example: • FDI • Portfolio investments • Short term and long term loans International finance 120181-1165

  14. Statistical errors and omissions • Various data sources concerning the debit and the credit entries • Difficulties concerning services transactions data collection • The financial account- specific statistical difficulties • The division of statistical discrepancies International finance 120181-1165

  15. Official reserve assets transactions • The financial account • Interventions on the FX market • CB’s • Governments (other assets than reserves) International finance 120181-1165

  16. Official reserve assets transactions • „The balance of payments”- BP transactions except foreign reserve assets transactions • CA balance + CAP balance + FA balance except foreign reserve assets transactions and statistical errors and omissions International finance 120181-1165

  17. The balance of payments equilibrium • According to the definition: • CA balance+ CAP balance + FA balance=0 • In practice- errors and omissions International finance 120181-1165

  18. The balance of payments equilibrium • Accounting and economic equlibrium • Autonomous and compensatory transactions • The real equlibrium International finance 120181-1165

  19. The international investment position • The net IIP- the difference between foreign assets and liabilities • IIP- a report about the foreign assets and liabilities structure • The analisis of the way investments are being financed in an economy International finance 120181-1165

  20. The international investment position International finance 120181-1165

  21. Foreign debt • A part of the total debt in a country that is owed to foreign creditors • Debtors- Governments, companies, households • „Sustanaible debt” – the level of the debt which allows the debtor, to settle his accounts International finance 120181-1165

  22. Foreign debt • Foreign debt indicators: • Debt/GDP • Debt/exports • Governement debt/ tax income • Short term debt • Debt service indicators International finance 120181-1165

  23. The balance of payment analysis International finance 120181-1165

  24. Preliminary conclusions • CA deficit • Deficit cause by trade in goods • Services trade surplus • FA surplus • CA deficit is financed through the inflow of investments International finance 120181-1165

  25. Foreign debt indicators • Debt to GDP 63,5% • Short term debt to reserve assets 88% • Short term debt to overall debt 27% International finance 120181-1165

  26. Debt to GDP International finance 120181-1165

  27. BP adjustment mechanisms • Price adjustment mechanism • Income adjustment mechanism • Monetary adjustment mechanism • Adjustment policy International finance 120181-1165

  28. Price adjustment mechanism • BP equilibrium reinstatment through price changes • Floating ERR • Fixed ERR International finance 120181-1165

  29. Price adjustment mechanism- fixed ER • Gold standard example • The reinstatement of the BP equlibrium follows the pattern of the gold standard International finance 120181-1165

  30. Price adjustment mechanism- floating ER • ER adjustments • BP deficit  ER depreciation  relative decrease of the domestic prices  decrease of imports, increase of exports  the equilibrium is reinstated • BP surplus  ER appreciation relative growth of domestic prices  decrease of exports, increase of imports  the equilibrium is reinstated International finance 120181-1165

  31. The Marshall-Lerner condition • Concerns only the CA • ER changes may lead to the reinstatement of the equilibrium only if the sum of demand elasticity for imports and exports is larger than one International finance 120181-1165

  32. The Marshall-Lerner condition • ηEx + ηIm>1 ER changes may reinstate the equilibrium • ηEx + ηIm=1  ER changes do not influence the equilibrium • ηEx + ηIm ER changes deepen the unequilbrium International finance 120181-1165

  33. The Marshall-Lerner condition • The imports and exports structure • Various demand elasticities for various goods • Industrial products- larger elasticity • Raw materials- weaker elasticity International finance 120181-1165

  34. The problem of inflationary pressures • Imports inflation • The replacement of imports through domestic production • Increase of demands for exports  growing production for export sales International finance 120181-1165

  35. Income adjustment mechanism • The interdependency between consumption and income • The marginal propensity to consume • MPC= ΔC/ ΔY • The influence of investments on income International finance 120181-1165

  36. Income adjustment mechanism • Multiplier mechanism • The influence of consumption and investment growth on income • ΔY= ΔI/ MPS+MPI • ΔY/ ΔI= 1/ MPS+MPI • ΔY/ ΔI= 1/1-MPC+MPI International finance 120181-1165

  37. Income adjustment mechanism • Invetsment growth income growth  imports growth • Exports growth  income growth  imports growth International finance 120181-1165

  38. Income adjustment mechanism • The dependence of the internal equilibrium on the external equilibrium • Exports growth exogenous?  it depends of the imports growth abroad • The imports growth abroad depends on the country’s income • Income growth in one country  increase of imports  exports growth in the other country  income growth in the other country International finance 120181-1165

  39. Income adjustment mechanism • The functioning of the mechanism depends on MPI • The multiplier works until the maximum potential output is reached • The decrease of the income or imports triggers a reversed multiplier International finance 120181-1165

  40. Examples • Great depression 1923-1933 • The 90-ties crises (Brasil, Russia) • The fianancial and economic crisis 2008-2009 • A positive multiplier- South-East Asia countries International finance 120181-1165

  41. The monetary adjustment mechanism • Reinstatement of the equilibrium through influencing the relation between money demand and supply • BP equlibrium as a monetary phenomenon International finance 120181-1165

  42. The monetary adjustment mechanism • Money supply surplus  increase of expenses  price growth  imports growth, exports decrease  BP deficit  foreign reserve asstes decrease  money supply decrease  price decrease exports increase, imports decrease  the equilibrium is reinstated International finance 120181-1165

  43. The monetary adjustment mechanism- fixed ER • The goals of the mechanism and the economic policy are contradictory  sterilisation • The mechanism is disabled International finance 120181-1165

  44. The monetary adjustment mechanism- floating ER • Money supply surplus  increase of expenses  price increase  imports increase, exports decrease  BP deficit  depreciation  price increase  money demand increase the monetary equilibrium reinstated BP equilibrium International finance 120181-1165

  45. Summing up • Invetsments in an open economy may be financed through foreign savings • BP is a schedule of transactions between residents and nonresidents during a specified period of time International finance 120181-1165

  46. Summing up • The BP construction • BP and IIP as a tool of economic analysis • Automatic adjustment mechanisms International finance 120181-1165

  47. Refernces • Balance of payments and international investment position manual, sixth edition, IMF, 2008 • P. Krugman, M.Obstfeld, International economics: theory and policy, Pearson, Addison Wesley, Boston2009. • F. Breuss, Robinson and Marshall-Lerner conditions with positive import content of exports, European Economic Review, 1984 • A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2004, • A. Rose,The role of exchange rates in a popular model of international trade: Does the ‘Marshall–Lerner’ condition hold?, Journal of International Economics,1991, • K. Sauernheimer, Theorie der Aussenwirtschaft, Verlag Vahlen, Munchen 2006. International finance 120181-1165

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