Transcript Balance of Payments - Villanova University

MSNBC
[Moscow, 1-30-98]
“The
central bank said from
Monday its refinancing rate would
rise to 42 percent, its highest level
for nine months and double the 21
percent it had fallen to in October
before the Asian crisis engulfed
Russian markets.”
MSNBC
[Moscow, 1-30-98]
“The
refinancing rate is the rate at
which major banks can borrow
overnight money from the central
bank, and indicates where the
central bank believes the ceiling
for Treasury bill yields should be.”
MSNBC
[Moscow, 1-30-98]
“Raising
the refinancing rate
lets yields rise to a level where
Treasury bills and bonds may
again be attractive, and could
help staunch the flood of money
out of Russia.”
Chapter 5:
The Balance of Payments
and International
Economic Linkages
Balance of Payments
???
Balance of Payments
Net value of all economic
transactions - including trade in
goods and services, transfer
payments, loans, and
investments - between residents
of the same country and those
of all other countries.
BoP and GDP
GDP  C  I  G  ( X  M )
where :
C  consumption spending
I  capital investment spending
G  governmentspending
X  exports of goodsand services
M  imports of goodsand services
(X - M)  balance on current account
BOP and GDP – 2008-IV
Source: Bureau of Economic Analysis
[www.bea.gov]
GDP  C  I  G  ( X  M )
14,281 10,059  2,004  2,883 (1,868 2,533)
14,281 10,059  2,004  2,883 665
BoP and GDP – 2008-IV
[GDP = C + I + G + (X – M)]
16,000
14,000
12,000
$, Bils.
10,000
8,000
6,000
4,000
2,000
0
-2,000
GDP
CONS
INV
GOV
X-M
Top 5 Countries with
which the U. S. Trades, 2007-08
Country
Total-2008
[Bils., $]
Total-2007
[Bils., $]
Top 5 Countries with
which the U. S. Trades, 2007-08
Country
Total-2008
[Bils., $]
596.9
Total-2007
[Bils., $]
562.0
China
409.2
386.7
Mexico
367.5
347.3
Japan
205.8
208.1
Germany
152.3
144.0
Canada
Top 5 Countries with which the U. S.
has a Trade Deficit, 2007-08
Country
Deficit-2008
[Mils., $]
Deficit-2007
[Mils., $]
Top 5 Countries with which the U. S.
has a Trade Deficit, 2007-08
Country
Deficit-2008
[Mils., $]
-266,333
Deficit-2007
[Mils., $]
-256,269
Canada
-74,641
-64,673
Japan
-72,669
-82,799
Mexico
-64,376
-74,258
Germany
-42,821
-44,712
China
Top 5 Countries with which the U. S.
has a Trade Surplus, 2007-08
Country
Surplus-2008
[Mils., $]
Surplus-2007
[Mils., $]
Top 5 Countries with which the U. S.
has a Trade Surplus, 2007-08
Surplus-2008
[Mils., $]
Surplus-2007
[Mils., $]
Netherlands
19,083
14,566
Hong Kong
15,149
13,090
UAE
14,455
10,270
Singapore
12,925
Australia
11,874
Country
10,589
Balance of Payments Accounts
Current Account
Financial Account
Capital Account
Errors
and Omissions
Reserves and Related Items
Balance of Payments Accounts
Current Account:
(millions)
Goods - 2008: - $821,153
Services - 2008: + $144,054
Net Amount
- $677,099
Balance of Payments Accounts
Financial Account
– Direct foreign investment
– Portfolio investment
– Other capital investment – shortterm financial transactions
Balance of Payments Accounts
Capital Account:
– Debt forgiveness
– Assets transferred by people who
move from one country to another
– Sale of patents and trademarks
Balance of Payments Accounts
Double
Entry System:
debits offset credits
sum of transactions equals zero
unaccounted for differences are
recorded as statistical discrepancy
Balance of Payments Accounts
Debit
Entries:
purchase of foreign goods,
services, or assets
decline in foreign liabilities
Balance of Payments Accounts
Credit
Entries:
sale of domestic goods, services,
or assets
increase in foreign liabilities
Balance of Payments Accounts
Current Account
Financial Account
Capital Account
Errors
and Omissions
Reserves and Related Items
International Account Relationships
Current 
Account   P rivate - P rivate  - Govt. 
Savings Investment Deficit








Balance 
Z
Sp
a in
Au
str
ia
GE
R
Ca
na
da
Be
lgi
um
Fr
an
ce
Ja
pa
n
SW
US
A
Ne
th
Br
ita
in
Savings Rate (%)
Americans Are Poor Savers
[OECD, 1980-88]
18
16
14
12
10
8
6
4
2
0
“Where Housing Market Goes,
So Goes Consumer Spending”
-Wall Street Journal Online; 9-27-05
“Over
the past decade,
[Greenspan] said, the market value
of owner-occupied homes has risen
from $8 trillion to $18 trillion,
while home-mortgage debt linked
to these structures has risen at a
somewhat faster rate.”
“Where Housing Market Goes,
So Goes Consumer Spending”
-Wall Street Journal Online; 9-27-05
“Surveys
indicate that
approximately a fourth to a third of
the value of home equity loans and
refinancing cash-outs is directly
used for personal consumption
expenditures …”
“Where Housing Market Goes,
So Goes Consumer Spending”
-Wall Street Journal Online; 9-27-05
“[Greenspan]
then argued that it is the
increase in consumer spending
financed by such home-equity
extraction – rather than by income or
other assets – that is probably
responsible for much of the decline in
the U. S. personal-savings rate since
1995.”
“Where Housing Market Goes,
So Goes Consumer Spending”
-Wall Street Journal Online; 9-27-05
“…
if mortgage rates rise, or average
home prices become increasingly hard
to afford, Americans may find it harder
to extract cash from refinancing or
selling their homes, and the personal
saving rate, accordingly, would rise.”
“Where Housing Market Goes,
So Goes Consumer Spending”
-Wall Street Journal Online; 9-27-05
“Another
economic side effect, Mr.
Greenspan argued, would be that
imports of consumer goods and the
materials to make these goods would
also decline, subsequently shrinking
the U. S. trade deficit.”
“7 reasons Americans save so little”
-MSN, MoneyCentral, 2/4/2004
 Credit’s
easy, and debt carries no stigma
 Someone or something will bail me out
 False sense of financial security
 It’s the tax code, stupid
 Don’t believe the stats: people are saving
 Carpe diem is the way to live
 I’ll work to my grave
-50
-150
-250
-350
-450
-550
-650
-750
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
U. S. Balance on Goods, Services,
and Income 1981-2007 ($, Billions)
150
50
U. S. Balance of Trade, 1954-2008
[Goods & Services]
300
-300
-500
-700
-900
Goods
Services
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1984
1974
1964
-100
1954
100
How to cope with the trade deficit?
Currency
depreciation
Protectionism
End foreign ownership of U. S.
assets
Increase the savings rate
Should We Devalue the $?
Overvalued
currency
– tax on exports; subsidy to imports
Weaker currency should reduce
deficits
Contrary to U. S. experience
“J-curve” theory
The Theoretical J-Curve
Net change in trade balance
8
Trade balance
eventually
improves
6
4
2
Currency depreciation
0
-2
-4
-6
Trade balance
initially deteriorates
Tim e
Protectionism:
Tariffs, Quotas, etc.
Each
raises domestic prices
and erodes purchasing power
Lower standard of living
Tend to reduce both imports
and exports - deficit remains
unchanged
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“President
Clinton imposed tariffs
on steel imports valued at $410
million today, answering pleas
from steel makers and labor unions
but raising tensions with South
Korea, Brazil, Germany, Japan and
other major trading partners.”
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“The
duties, which take effect
immediately, will sharply raise the
price of steel imports that exceed a
quota pegged at 1998 import
levels. The United States says it
was flooded with steel imports in
1998 and 1999.”
“Clinton Imposes Tariffs on Steel
Imports That Exceed Quota”
[New York Times, 2-12-00]
“The
action places a 10 percent
duty on wire rod and a 19 percent
surcharge on line pipe, with the
duties phased out over three years.
The duties will hit only those
imports that exceed the 1998
baseline.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“In
a stinging rebuke to the United
States, the World Trade Organization ruled Friday that heavy
duties on steel imports imposed by
the Bush administration violate
global trade rules.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“A three-member
panel of trade
experts said in a 968-page ruling
that the “safeguard” duties of up to
30 percent … were out of line with
WTO rules.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“Washington
immediately said it
would appeal, and would keep in
place the tariffs that President Bush
had justified as necessary to protect
domestic steel producers against a
flood of cheap imports during a
restructuring period.”
“WTO panel rules that U. S.
steel duties are illegal”
[MSNBC, 7-11-03]
“In
response, the European Union
stepped up plans to impose $2.2
billion in retaliatory duties on U. S.
imports, ranging from footwear to
fruit and vegetables – possibly
pricing them out of the market.”
“Bush Administration to Impose Tariff
on Softwood Lumber from Canada”
[Wall Street Journal, 8/10/01]
“The
Bush administration announced
Friday that it would impose a 19.3%
penalty tariff on softwood lumber
imported from Canada in retaliation for
what the U. S. said were unfair
government subsidies given to the
Canadian lumber industry.”
“Bush Administration to Impose Tariff
on Softwood Lumber from Canada”
[Wall Street Journal, 8/10/01]
“An
economist for the National
Association of Home Builders said the
higher tariffs could add up to $1,000 to
the cost of a new home.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“French
Prime Minister
Dominique de Villepin’s
government has arranged for the
merger of Suez and Gaz de France
in a $37.98 billion deal, in an effort
to fend off a hostile bid for Suez by
Italy’s Enel.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“The
efforts to fight off foreign
buyers of publicly traded
companies come amid a wave of
cross-border takeovers in Europe
and underscore how nationalism
continues to thwart the integration
of the Continent’s economy.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“The
moves will test Europe’s
commitment to enforcing a free
flow of capital and whether
Brussels has the means to face
down protectionism in two of the
European Union’s most powerful
capitals, the Journal writes.”
Cross-Border M&A Moves
Fan Protectionism in EU
- The Wall Street Journal, 2/27/06
“This
is the first opportunity the
prime minister has to demonstrate
he can do something concrete
about his doctrine of economic
patriotism ...”
End Foreign Ownership
of U. S. Assets
Increase
domestic interest rates
Result: more domestic savings
Result: domestic investment will
fall
Result: slower economic growth
Stimulate Domestic Saving
Provide
tax incentives for
saving:
– Traditional IRA Accounts
– Roth IRA Accounts
– 401(k) & 403(b)(7) plans
– Section 529 plans
“U.S. Trade Deficit Widens, ...”
[New York Times, 9/21/95]
“In
the long run, according to
textbook economics, the huge
American trade gap is an inevitable
result of the nation’s saving too
little [in order] to finance a high
level of consumption.”
“U.S. Trade Deficit Widens, ...”
[New York Times, 9/21/95]
“Foreigners
essentially lend to the
United States the difference,
obtaining the wherewithal by
selling more goods and services
here than they buy.”