Transcript Lecture 6 (POWER POINT)

International Finance
FINA 5331
Lecture 6: Balance of Payments
Read: Chapters 3
Aaron Smallwood Ph.D.
More recent data (billions $)
Current
Account
Fin
Account
FDI
In
FDI
Out
Port.
Assets
Port.
Liab.
Reserve
2011:Q1 26.587
108.80
67.70
-6.10
-2.80
0.200
-141.20
2011:Q2 50.720
112.80
61.80
-11.30
3.40
7.700
-142.50
2011:Q3 31.195
69.00
41.70
-15.90
4.10
5.800
-91.700
2011:Q4 27.498
-30.50
60.40
-15.10
1.60
-0.300
-12.400
2012:Q1 49.264
54.60
48.80
-14.8
3.40
5.900
-74.600
2012:Q2 58.064
-42.10
41.10
-13.3
2.50
8.700
11.800
2012:Q3 59.348
-52.50
38.50
-13.7
-10.6
15.200
0.400
2012:Q4 26.424
19.00
62.60
-20.6
-1.70
24.500
-34.1
2013:Q1 73.996
88.50
32.00
-21.3
-2.90
17.000
-157.00
2013:Q2 54.230
27.7
45.60
-15.7
-4.90
14.900
-46.600
More recently
• Smaller current account surpluses for China. (in billions)
– 2011: $136.0, 2012: $193.1, 2013: $182.8 (est)
• Surprisingly in Feb of this year, China ran a deficit of $23
billion. The surplus for the first quarter of 2014 was only $7.2
billion ($28.8 billion at annual rate).
• More private investment in China than Chinese investment
abroad
• Official reserve holdings declined to $387.8 billion in 2011,
and even further to $96.5 billion in 2012 ($203.6 billion
through Q2 2013).
• Real GDP has slowed slightly. According to the World Bank,
from 10.4% in 2010 to 7.7 % in 2013.
If you are interested
• Specific information related to US balance of payments
can be found at the Bureau of Economic Analysis’
website:
• http://www.bea.gov/newsreleases/international/transactions/2
014/pdf/trans413.pdf
• For example, official reserves declined by $2.782 billion
in Q4: 2013, resulting in a positive entry of $2.782 in US
official reserves.
Balance of Payments and National Income
Accounting
•
•
•
•
1.
2.
3.
4.
GNP = Y = C + I + G + X – M
Y=C+S+T
X – M = (S- I) + (T- G)
If a developing economy experiences large
trade deficits (X-M <0), the remedies are:
Savings must increase, S↑
Investment must fall, I↓
Government spending must fall, G↓
Taxes must rise, T↑
In class project
•
Let’s classify several hypothetical transactions for the
US.
–
–
–
–
–
A Japanese insurance company purchases $1,000,000 worth
of bonds from a US company. The Japanese company owns
2% of the outstanding shares of the US company. They pay
for the bonds out of a bank account kept in New York City.
A US computer programmer is hired by a Chinese company
for consulting and gets paid $60,000 from a US bank account
maintained by the Chinese company.
An American living in Los Angeles sends a check for $20,000
drawn on his LA bank account as a gift to his parents in
Bombay.
The Federal Reserve sells yen and acquires $500,000 on the
open market from a US car dealer. The car dealer uses their
proceeds of yen to acquire $500,000 worth of Hondas.
A Dutch trader receives a dividend check from IBM for
$25,000. The check is drawn on a bank in New York.
Official reserves
•The official settlements balance, sometimes
referred to as the overall balance, is the total
balance on the current account plus the
balance on all NON-OFFICIAL reserve
transactions.
•It must be exactly offset by the balance on
official reserves transactions
Official reserves
•When a country buys foreign reserves (for
example, if the People’s Bank of China acquires
dollars):
– China’s assets increase: Debit entries in official
reserves (a deficit)
– Offset by an official settlements surplus
•If a country must sell official reserves (Thailand in
1997 because of speculative attacks):
– The country’s reserve assets decrease: Credit
entries in official reserves (a surplus)
– Offset by an official settlements deficit.