Transcript The Balance of Payments
The Balance of Payments Definition and structure Balance of payments • overall view of transactions with the rest of the world. • Made up of three separate accounts • Current Account • Capital Account • Financial Account Balance of Payments – Current Account • It is a record of all money flows from international transactions between the Kz and the rest of the world • Trade in Goods • Trade in Services • Investment Income • Capital Transfers Trade in Goods (visibles) • • • • • Consumer Durables Capital Goods Commodities Components Foodstuffs and Beverages Services (invisibles) • • • • • Tourism Financial Services Insurance Music and entertainment Banking Financial Account: Investment Income • • • • Investment in companies overseas, And their investment in us FDI Foreign Direct Investment. Other investments e.g. Loans to banks. Capital Transfers • • • • Transfer of money between individuals Kazakhs working overseas Grants to overseas countries Contributions to International organisations e.g. IMF, World Bank and WTO. Capital Account • Acquisition or disposal of Non produced or non financial assets. • • • • • Capital transfer credits Donation from Canada to Tanzania for schools Dr from Canada Cr to Tanzania Capital transfer debits UK to finance an Airport St. Helena. Debt forgiveness • If Rwanda relieved of its debts = Cr in Rwanda’s capital account. • If a bank in Switzerland , which made a loan to government of Sierra Leone waived that debt = Dr in Switzerland’s Capital Account. Foreign Exchange Reserves • If there is a deficit in the Balance of Payments the government will draw on reserves to rectify the deficit and support the exchange rate. Current Account Prepare the balance of payments for the country whose international exchanges are shown in the table below Category Balance/billion s$ Imports of goods Import of services export of goods export of services income current transfers direct investment portfolio investment capital transfers 550 400 380 550 -130 70 40 -80 90 transactions in non produced non financial assets -25 reserve assets a. balance of payments b. Prepare the balance of payments for the country whose international exchanges are shown in the table below Category Balance/billion s$ Imports of goods Import of services export of goods export of services income current transfers direct investment portfolio investment capital transfers 550 CA 400 CA 380 CA 550 CA -130 CA 70 CA 40 FA -80 FA 90 Cap Ac transactions in non produced non financial assets -25 Cap Ac reserve assets a. balance of payments b. Calculate the following balances i current account -80 ii financial account -40 iii capital account 65 iv reserve assets 55 v balance of payments 0 UK Deficit Narrows of which: EU £3.2 non-EU -£10.9 Trade in Goods Deficit Widens Prepare the balance of payments for the country whose international exchanges are shown in the table below Category Balance/billion s$ Imports of goods Import of services export of goods export of services income current transfers direct investment portfolio investment capital transfers 550 400 380 550 -130 70 40 -80 90 transactions in non produced non financial assets -25 reserve assets a. balance of payments b. Consequences for Japan Balance of Payments Surplus • Positive Current Account balance. • • • • Country has a high demand for exports High demand for local currency Leads to appreciation of currency value Makes M cheaper Consequences for USA of a Balance of Payments Deficit • Negative Current Account Balance • Means that another part of the account must be in surplus to create a balance of money. • The magnitude of the deficit is important, measured as a % of GDP How to fix a large Current Account Deficit • Encouraging people to buy locally produced products. • Devalue currency • Reduce AD. Demand & Supply side causes of deficit • Short-term factors eg Strong consumer demand – • Leads to a very high level of demand for imported goods and services • UK consumers have a high income elasticity of demand for overseas-produced goods Demand & Supply side causes of deficit • The strong sterling exchange rate in the past has helped to reduce the UK price of imports causing expenditure-switching effect • weakness of the global economy and in particular the very slow growth in the Euro Zone has damaged UK export growth. causes of deficit in UK • 55% of all UK X go to EU • shifts in comparative advantage (China) • The availability of cheaper M inevitably causes a substitution effect from British consumers Causes of deficit • Weak product innovation and R & D • The UK manufacturing sector has been in longterm decline for more than twenty years. • Lack of productivity, inflexible labour market Implications of a deficit • There is a net outflow of demand and income from the circular flow of income and spending. • The current account need not balance as long as the financial account is in surplus – need to attract investment, savings etc • The UK has run large current account deficits in with barely any effect on the overall economy. • Small chance of speculative selling of sterling on the foreign exchange markets Implications of a deficit • If the deficit is due to very strong consumer demand, it automatically self corrects when the economic cycle turns • increased imports of new capital & technology which improves productivity in LR could cause deficit – not a problem • A widening trade deficit may result in lost output & employment because it represents a net leakage. Implications of a deficit • Foreign investors may eventually take fright, lose confidence and take their money out. • Deficit represents an S>D of the currency in the foreign exchange market • can lead to a Price therefore exchange rate WILL A DEPRECIATION OF THE CURRENCY LEAD TO THE ELIMINATION OF A BALANCE OF TRADE DEFICIT? Surplus on the current account Time Deficit on the current account Net improvement Point when currency depreciates terms of trade • = the rate of exchange of one good or service for another when two countries trade with each other. Terms of Trade Index • ToT = 100 x Average export price index / Average import price index • If export prices faster than M prices, . • D X and D M • If import prices faster than export prices, the terms of trade have deteriorated Plenary • On your boards write two important things you have learned about the Balance of Payments.