Global Business Environment

1
Global Business Environment

• Course material available on http//cfi.epfl.ch/p
  age25521.html
• Syllabus
• Exams, reading material, etc.
• Please switch off your cellular in class
• Short break (at about 1100)

2
National Income Accounts

• Records the value of national income that results
  from production and expenditure
• Countrys income countrys output
• Producers earn income from buyers who spend money
  on goods and services.
• The amount of expenditure by buyers the amount
  of income for sellers the value of production

3
GNP and GDP

• Gross National Product (GNP)
• The value of all final goods and services
  produced by a countrys factors of production and
  sold on the market in a given time period
• It is the basic measure of a countrys output.
• Gross Domestic Product (GDP)
• The value of all final goods and services
  produced within a country in a given time period.
• GDP GNP factor payments from foreign
  countries factor payments to foreign countries
  

4
Components of GNP

• Four components of GNP
• Consumption expenditure by domestic residents
• Investment expenditure by firms on plants
  equipment change in inventories
• Government purchases expenditure by governments
  on goods and services
• Current account balance (exports minus imports)
  net expenditure by foreigners on domestic goods
  and services

5
Swiss GDP First quarter 2007
6
U.S. GDP 2005
7
National Income Identity
Y C I G EX IM
Y is GNP C is consumption I is
investment G is government purchases EX is
exports IM is imports
8
Current Account

• Current account (CA) balance
• CA EX IM
• A country has a CA surplus when its CA gt 0
• A country has a CA deficit when its CA lt 0
• CA measures the size and direction of
  international borrowing.
• A countrys current account balance equals the
  change in its net foreign wealth

9
Swiss Net Exports and Current Account as of
GDP, 19801-20071
10
Net Exports and the CA

• What is the difference?
• CA
• EX IM Net Income Payments Net Unilateral
  Transfers
• ? Net Exports
• Net Income Payments International interest and
  dividend payments
• Net Unilateral Transfers net payments that do
  not correspond to the purchase of any good,
  service or asset
• This difference is small for most countries very
  large for Switzerland. Why?

11
The Current Account and Foreign Indebtedness

• The current account measures the size and
  direction of international borrowing
• When a country imports more than it exports, it
  buys more goods than it sells to them
• Hence the country borrows from foreigners
• A country with a current account surplus must be
  increasing its net foreign asset position
• The countrys current account balance equals the
  change in the countrys net foreign wealth

12
Swiss Net Foreign Asset Position as of GDP,
1985-2006
13
Saving and the Current Account

• National saving (S)
• The portion of output, Y, that is not devoted to
  household consumption, C, or government
  purchases, G.
• S Y C G
• S C G I CA C G
• S I CA
• You can save either by building up domestic
  capital stock or by acquiring foreign wealth

14
Saving

• Private saving (Sp)
• The part of disposable income that is saved
  rather than consumed
• Sp Y T C
• T taxes
• Government saving (Sg)
• Sg T G

15
National Saving

• S Y C G
• S (Y T C) (T G)
• S Sp Sg
• Government budget deficit (G T -Sg)
• It measures the extent to which the government is
  borrowing to finance its expenditures

16
Swiss Government Budget Surplus as of GDP,
1990-2005
17
Saving, Investment and CA as of GDP, 1990-2006
18
The Balance of Payments Accounts

• A countrys balance of payments accounts keep
  track of both its payments to and its receipts
  from foreigners.
• Every international transaction automatically
  enters the balance of payments twice once as a
  credit () and once as a debit (-).
• The Balance of Payments (BOP) consists of three
  accounts current, financial and capital

19
The Balance of Payments Accounts, cont.

• Three types of international transactions are
  recorded in the balance of payments
• Exports or imports of goods or services
• Exports enter with a in the current account
• Imports enter with a in the current account
• Purchases or sales of financial assets
• Purchases of assets enter with a - in the
  financial account
• Sales of assets enter with a in the financial
  account
• Transfers of wealth between countries (non-market
  trnsct)
• They are recorded in the capital account.

20
Examples of Paired Transactions

• A U.S. citizen buys a 1000 printer from an
  Italian company, and the Italian company deposits
  the 1000 in its account at Citibank in New York.
• That is, the U.S. trades assets for goods.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. current account with a
  negative sign (-1000).
• It shows up as a 1000 credit (positive sign) in
  the U.S. financial account.

21
Another example

• A U.S. citizen pays 200 ( 136) for dinner at a
  French restaurant in France by charging his Visa
  credit card.
• That is, the U.S. trades assets for services.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. current account with a
  negative sign (-200).
• It shows up as a 200 credit in the U.S.
  financial account.

22
Yet another example

• A U.S. citizen buys a 95 newly issued share of
  stock in the United Kingdom oil giant British
  Petroleum (BP) by using a check drawn on his
  stockbroker money market account. BP deposits the
  95 in its own U.S. bank account at Second Bank
  of Chicago.
• That is, the U.S. trades assets for assets.
• This transaction creates the following two
  offsetting entries in the U.S. balance of
  payments
• It enters the U.S. financial account with a
  negative sign (-95) for the import of the UK
  asset.
• It shows up as a 95 credit in the U.S. financial
  account for the export of a US asset.

23
The Fundamental Balance of Payments Identity

• Any international transaction automatically gives
  rise to two offsetting entries in the balance of
  payments resulting in a fundamental identity
• Current account financial account capital
  account 0

24
Balance of Payments Accounts

• The Current Account, Once Again
• The balance of payments accounts divide exports
  and imports into three categories
• Merchandise trade
• Exports or imports of goods
• Services
• Payments for legal assistance, tourists
  expenditures, and shipping fees
• Income
• International interest and dividend payments and
  the earnings of domestically owned firms
  operating abroad

25
Balance of Payments Accounts

• The Capital Account
• records special asset transfers, but this is a
  minor account for the US
• The Financial Account
• It measures the difference between sales of
  assets to foreigners and purchases of assets
  located abroad.
• Financial inflow (export of an asset, )
• A loan from the foreigners with a promise that
  they will be repaid (this is the US check
  deposited in the Italian bank)
• Financial outflow (import of an asset, - )
• A transaction involving the purchase of an asset
  from foreigners (this is the purchase of a BP
  stock)

26
Balance of Payments Accounts

• Financial account has at least 3 categories
• Official (international) reserve assets
• All other assets
• Statistical discrepancy

27
US Balance of Payments Accounts, 2003 in Billions
of Dollars
28
US BoP 2003

• Exports 1314.9 Imports 1778.1 Net unilateral
  transfers -67.4
• Net Exports -530.7
• Imports larger than Exports
• This is a net borrowing from the rest of the
  world, i.e. U.S. assets must have flown out of
  the country

29
US Balance of Payments Accounts, 2003 in Billions
of Dollars
30
US BoP 2003

• Debits, financial outflows, import of assets
  -283.4
• Credits, financial inflows, export of assets
  829.2
• Balance on financial account 545.8
• Capital Account -3.1
• Statistical Discrepancy 530.73.1-545.8
• -12.0

31
Official Reserve Transactions

• Central bank
• The institution responsible for managing the
  supply of money
• Official international reserves
• Foreign assets held by central banks as a cushion
  against national economic misfortune
• Official foreign exchange intervention
• Central banks often buy or sell international
  reserves in private asset markets to affect
  macroeconomic conditions in their economies

32
The Balance of Payments Accounts

• Official settlements balance (balance of
  payments)
• The book-keeping offset to the balance of
  official reserve transactions
• It is the sum of the current account balance, the
  capital account balance, the nonreserve portion
  of the financial account balance, and the
  statistical discrepancy.
• Example The U.S. balance of payments in 2000 was
  -35.6 billion, that is, the balance of official
  reserve transactions with its sign reversed.
• A country with a negative balance of payments may
  signal that it is running down its international
  reserve assets or incurring debts to foreign
  monetary authorities.

33
Case Study The United States 1976-2006
34
Is the U.S. current account deficit sustainable?

• The United States have been running current
  account deficits since the early 1970s. In 2006,
  the U.S. current account deficit was 6.2 of GDP
• As a result, the net foreign asset position of
  the United States has been worsening (the U.S. is
  a net debtor)
• Is this sustainable in the long run?

35
The U.S. dollar exchange rate