Transcript Document

International Economics
Mordecai E. Kreinin
Part II
International Financial Relations
Copyright ©2002 South-Western/Thomson Learning.
All rights reserved.
CHAPTER 13
Domestic Policies to
Adjust the Balance of
Payments
C13-2
OVERVIEW
 “Automatic” Processes
 Summary of the “Automatic” Balance-ofPayments Adjustment
 Government Policy
 Foreign Repercussions
 The Balance of Payments in the Context of
General Policy Objectives
 Some Unanswered Questions
C13-3
Important Concepts
 Marginal propensity to
consume
 Marginal propensity to save
 Marginal propensity to
import
 Multiplier
 Foreign trade multiplier
 Specie-flow mechanism
 Velocity (V)
 Demand elasticity
 Automatic adjustment
mechanism
 Monetary policy
 Fiscal policy
 IMF conditionality
 Expenditures-changing
policies
 Portfolio capital
 Portfolio approach
 Locomotive country
 Foreign repercussions
 Consistent situation
 Inconsistent situation
 Degree of impact
 Time lags
 Incompatible trinity
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“Automatic” Processes




The Monetary Mechanism
Imbalance and Money Supply
Add
Direct Effect on Private Expenditures

Income changes
 Price changes
 MPC, MPS, MPM
 The multiplier
 X and GDP
 Additional Insights: The specie-flow mechanism


The equation of exchange
Keynesian Position
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Additional Insights:
The Foreign Trade Multiplier
 Marginal propensity to consume
 Marginal propensity to save
 Marginal propensity to import
 Income and Price Mechanisms
 Trade and the national economy
C13-6
Summary of the “Automatic”
Balance-of-Payments Adjustment
 Automatic adjustment mechanism under fixed
exchange rates, a function of aggregate
expenditures, money supply—operating in same
direction, affecting economy through income and
price mechanism
C13-7
The Four Linkages Involved in Automatic
Adjustment Mechanism Under Fixed
Exchange Rates
C11-8
Summary of the “Automatic”
Balance-of-Payments Adjustment
 Deficit vs. surplus in balance of payments
 Marginal propensity to import
 Improved competitive position and price elasticity
 Money supply mechanism, sterilization
 Surplus, deficit contain seeds of reversal
 Under fixed exchange rate, income and price
influence balance of payments in corrective direction
 Under floating exchange rate, above applies to
current account
C13-9
FIGURE 13.1
Automatic Processes that Reverse External
Imbalance under a Stable Exchange Rate
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Government Policy
 Domestic Policy Measures and the Current
Account

Expenditure-changing policies
 Effect on Direct Investment Capital
 Effect on Other Capital Movements

Portfolio capital

Portfolio approach

Monetary and fiscal policies

Monetary contraction
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Foreign Repercussions
 Leading industrial nation has additional
responsibility for fate of other countries
 To calculate foreign trade multiplier effect of any
policy, foreign repercussions must complete
circuit and affect policy-originating country
 No country completely free to pursue
independent domestic policies
 Coordinated reduction of interest rates
 Giving up fixed exchange rates or independent
monetary policy
C13-12
Foreign repercussions
can be shown
schematically for a twocountry world, where
country A experiences an
autonomous increase in
its exports to country B:
Country A
Country B
C11-13
The Balance of Payments in the
Context of General Policy Objectives
 Consistent situations
 Inconsistent situations
 Internal balance, external balance
 Relationship of balance of payments to
other economic goals
C13-14
Some Unanswered Questions
 Degree of Impact

Economic estimation
 Time Lags
C13-15
Summary
 Domestic policies to restore balance of payments
under fixed exchange regime
 Application to current account under flexible rate
regime
 Multiplier effect
 Deficits, surpluses
 Automatic mechanisms provide partial remedies
 Fiscal and monetary measures, expansionary
policies
 Consistent and inconsistent situations
C13-16
FIGURE A13-1.1
A Hypothetical Import Function
Based on Table A13-1.1
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FIGURE A13-1.2
A Hypothetical Export Function
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FIGURE A13-1.3
Derivation
of Total
Injection
and
Total
Leakage
Functions
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FIGURE A13-1.4
Equilibrium Output (YE)
Occurs Where (S + M) = (I + X);
Capital-Exporting Country (such as Japan)
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FIGURE A13-1.5
A Capital-Importing Country
(such as The United States):
I >S and M > X; (I – S) = (M – X)
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FIGURE A13-1.6
Effect on GDP of an Increase in (I + X)
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