The Balance of Payments and International Economic Linkages - PowerPoint PPT Presentation

1 / 30
About This Presentation
Title:

The Balance of Payments and International Economic Linkages

Description:

Measures all financial and economic transactions over a specified period of time. ... c. Official Reserves. 4. Current Account ... – PowerPoint PPT presentation

Number of Views:108
Avg rating:3.0/5.0
Slides: 31
Provided by: jgr87
Category:

less

Transcript and Presenter's Notes

Title: The Balance of Payments and International Economic Linkages


1
CHAPTER 5
  • The Balance of Payments and International
    Economic Linkages

2
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.

3
BALANCE-OF-PAYMENTCATEGORIES
  • 2. Double-entry bookkeeping
  • a. Currency inflows credits earn foreign
    exchange
  • b. Currency outflows debits expend
    foreign exchange

4
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.

5
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

6
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

7
BALANCE-OF-PAYMENTCATEGORIES
  • 6. Official Reserves Account (cont) b.
    Reserves consist of
  • 1.) gold
  • 2.) convertible securities

8
BALANCE-OF-PAYMENTCATEGORIES
  • 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. The Balance-of-payment measures
  • a. Some 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-PAYMENT CATEGORIES
  • 2.) Net Liquidity Balance
  • measures the change in private domestic
    borrowing or lending require to keep payments
    equal without adjusting official reserves.

11
BALANCE-OF-PAYMENTCATEGORIES
  • 3.) Official Reserve Transactions Balance
  • - measures adjustments needed by official
    reserves.

12
PART II. THE INTERNATIONAL FLOW OF GOODS,
SERVICES, AND CAPITAL
  • II. LINKS FROM INTERNATIONAL TO DOMESTIC FLOWS
  • A. Global Linkages
  • set of basic macroeconomic identities which
    link 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 (5.1)
  • b. National spending (NS) is
  • divided into personal spending C and
    investment (I)
  • NS C I (5.2)

14
THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND
CAPITAL
  • c. Subtracting (4.2) - (4.1)
  • NI - NS S - I (5.3)
  • If NI gtNS, S gt 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 will save more than it invests
    domestically with 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 (5.4)
  • where X exports
  • M imports
  • X-Mcurrent account balance (CA)

18
THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND
CAPITAL
  • 2. Combining (5.3) (5.4)
  • S - I X - M (5.5)
  • 3. If S - I Net Foreign Investment
    (NFI)
  • NFI X - M (5.6)

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 gt 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 - Govt 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

24
COPING WITH THE CURRENT ACCOUNT DEFICIT
  • II.CURRENCY DEPRECIATION
  • A. U.S. Experience
  • Does not improve the trade deficit.
  • B. Depreciations are 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
THE J - CURVE

Trade balance improves
Net change in trade balance
Currency depreciation
TIME
0
Trade balance initially deteriorates
26
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.

27
COPING WITH THE CURRENT ACCOUNT DEFICIT
  • C. FOREIGN OWNERSHIP
  • one protectionist solution would place limits
    on or eliminate foreign ownership leading to
    capital inflows.

28
COPING WITH THE CURRENT ACCOUNT DEFICIT
  • D. STIMULATE NATIONAL SAVING
  • change the tax regulations and rates.

29
COPING WITH THE CURRENT ACCOUNT DEFICIT
  • III. SUMMARY CURRENT-ACCOUNT
  • DEFICITS
  • - neither bad nor good inherently
  • 1. Since one countrys exports are anothers
    imports, it is not possible for all to run a
    surplus

30
COPING WITH THE CURRENT ACCOUNT DEFICIT
  • Deficits may be a solution to the problem of
    different national propensities to save and
    invest.
  • Homework Q 1,2, 7
  • Problems 11, 12
Write a Comment
User Comments (0)
About PowerShow.com