Transcript Chapter 13 (12 in 8 th edition) Balance of Payments Accounting

Dates
… and Places
April 1925 UK returns to gold
October 1929 The Great Crash
 Bretton Woods, ’44: IMF, IBRD
Sept 1931 UK leaves gold
Aug 15, 1971 Nixon Econ Program
• Vietnam, 1964…
 Gold window closed/Import surtax/Wage/Price Freeze
October 1973 Arab Oil Embargo
Oct 6, 1979 VolckerMonetarist experiment
1982+ Third World Debt Crisis
February 1985 $ - £ “parity”
 Plaza 9/85 – Louvre 2/87
Oct 19, 1987 Black Monday
• Japan bubble
Nov 9, 1989 Berlin Wall Down
 Maastricht, 1991
September 1992 ERM Collapse
 Washington Consensus
December 1994 Tequila Crisis
Aug 1997 – 1998 East Asia Crisis
Sept 1998 Long Term Capital Management
Jan 1, 1999 €
Sept 11, 2001
 Basel I,II,… 1988, 2004
January 2002 Argentine Peso Collapse
August 2007 US Mortgage Bubble Collapse
2008 US/UK/Ireland/Spain Housing Bubble Collapse
Credit Crunch:Bear/Fannie/Freddie/Lehman/Merrill
AIG/TARP/Currency Swaps
 PIIGS…2010 –
The National Income Accounts
 Gross national product (GNP)
• The market value of all final goods and services
produced by a country’s factors of production in a
year, whether in the country or abroad.
Y = C + I + G + EX – IM
Y = C + I + G + CA
Expenditure by domestic individuals and
institutions
National Income Accounting for an Open Economy
Consumption (C) = 70.6 % of 2010 GDP
•The portion of GNP purchased by the private sector to fulfill
current wants
Investment (I) = 12.0 % of 2010 GDP
•The part of output used by private firms to produce future
output
Government Purchases (G) = 20.5 % of 2010 GDP
•Any goods and services purchased by federal, state, or local
governments
Current Account (CA = “EX – IM”) = 12.5 – 16.1 = - 3.6 %
•Goods and services, including factor service, purchased by
foreigners net of foreign g&s purchased by residents
U.S. GNP and Its Components
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
The National Income Accounts
 Gross Domestic Product (GDP) measures the
volume of production within a country’s borders.
• GDP equals GNP minus net factor income from the rest of
the world. Income earned from production abroad doesn’t
count in gross domestic product.
GDP = GNP – Income earned abroad
National Income
•Earned over a period by a nation’s factors of production.
NI = GNP – Depreciation – IBT + Unilateral Transfers
For purposes of macro analysis,
GNP = Y = NI
 The Current Account and Foreign Indebtedness
• Current account (CA) balance: CA = EX – IM

CA measures the size and direction of international lending.
• If we import more than we export (CA<0), we must pay for the
difference by borrowing from foreigners.




CA equals the change in a country’s net foreign wealth.
CA balance is equal to the difference between national income
and domestic residents’ spending or absorption:
Y – (C+ I + G) = CA
CA balance is what we produce (Y) less domestic demand.
• We can live “beyond our means” if we run a current account
deficit, import more than we export, and borrow the difference
from foreigners.
CA balance is the excess supply of domestic financing.
• If we produce and earn more than domestic demand (CA>0), we
lend our “excess” saving to foreigners
U.S. Current Account and Net Foreign Wealth, 1976–2009
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
 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 = I in a closed economy.
• A closed economy can save only by building up its capital stock
• An open economy can save either by building up its capital stock
or by acquiring foreign wealth
S = I + CA
• A country’s CA surplus is its net foreign investment:
CA = NFI = Capital Outflows
- CA = Capital Inflows
International Monetary Arithmetic
Sources of Income = Uses of Income
C + I + G + CA = T + Sp + C
I = Sp + (T – G) – CA = Nat’l Saving+Capital Inflows
 Domestic investment is financed by our own saving plus our
net “borrowing” from foreigners
Nat’l Borrowing = - CA = (I - Sp) + (G – T)
The Twin Deficits
 Private Saving (Sp ) and Government Saving (Sg )
Sp = Y – T – C = I + CA – (T – G) = I + CA – Sg
Sp = I + CA + (G – T)
Private saving finances domestic investment, net foreign
investment, and the government’s deficit
The Balance of Payments Accounts
 Three types of international transactions
• Payments for exports or imports of goods or services,
•
•
including factor services
 Current Account
Purchases or sales of financial assets
 Financial Account
Transfers of wealth between countries
Capital Account
 The Fundamental Balance of Payments Identity
Current account + financial account + capital account = 0
U.S. Balance of Payments Accounts for 2006
(billions of dollars)
U.S. Balance of Payments Accounts for 2006
(billions of dollars, cont.)
12-13
Financial account has at least 3 subcategories:




Official (international) reserve assets
•
Foreign assets are held by central banks as a cushion against national
economic misfortune.
•
Central banks often buy or sell international reserves in private asset markets
to affect macroeconomic conditions in their economies.
•
Official reserve assets include government bonds, currency, gold and accounts
at the International Monetary Fund.
All other assets
Statistical discrepancy…so the balance balances
The (negative) value of official reserve asset change is called the official
settlements balance or “balance of payments.” A country with a negative
balance of payments is running down its reserve assets or incurring debts
to foreign monetary authorities.

In 2009, the Fed & Treasury increased their holdings of foreign assets by
$52.3 billion and foreign central banks and government agencies increased
their holdings of US assets by $450.0 billion. The $397.7 net inflow
 US “Balance of Payments” Deficit = $397.7 billion
U.S. Current Account and Net Foreign Wealth, 1976–2009
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
U.S. Gross Foreign Assets and Liabilities, 1976-2009
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2010.
International Investment Position of the United States at
Year End, 2005 and 2006 (millions of dollars)
12-17
International Investment Position of the United States at Year
End, 2005 and 2006 (millions of dollars)
Problems, Chapter 13



Why might a government be concerned about a large CA deficit or
surplus? Why might it be concerned about a large surplus or deficit in
its official settlements account (i.e., its “balance of payments”)?
Can a country have a CA deficit at the same time it has a BoP surplus?
Explain using hypothetical figures for the CA and the nonreserve
financial account. Discuss implications for official international
reserve flows.
In 2006, US income receipts on foreign assets were $647.6 billion
while payments on liabilities (foreign owned assets in the US) were
$604.4 billion. Yet the US is a substantial net debtor to foreigners.
How then is it possible that the US received more foreign income than
it paid out?