Transcript The notion and types of exchange rate

The balance of payments
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Lecture outline
 The notion of the balance of payments
 The construction of the balance of
payments
 The balance of payments analysis
 The balance of payments equilibrium
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The notion of the balance of
payments
 Transactions schedule between residents
and nonresidents within a specified period
of time
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BP and national income accounting
 Y=C+I+G+EX-IM
 CA=EX-IM
 CA=Y- (C+I+G)
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BP and national income accounting
 Autarky
 S=Y-C-G
 Y=C+I+G
 S=I
 An open economy
 S=I+CA
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BP and national income accounting
 An open economy may use its savings to
build its own capital or to purchase foreign
assets
 Investments in an open economy may be
financed through foreign savings
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BP and national income accounting
Private savings
Sp=Y-T-C
Governement savings
Sg=T-G
so
S=Sp+Sg=I+CA
Sp=I+CA-Sg=I+CA-(T-G)=I+CA+(G-T)
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The construction of the BP
 Debit entries eg. the purchase of foreign
goods  payment goes to foreign subjects
 Credit entries eg. exports of domestic
goods  payment goes to domestic
subjects
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The construction of the BP
 Current account
 Capital and financial account
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The construction of the BP
 A German consumer imports American
goods – a credit entry in the US CA
 An American company buys a Japanese
factory- debit entry in the US financial
account
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The current account
 Goods
 Services
 Income
 Current transfers
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The capital account
Transactions which trigger the transfer of assets
between countries
Eg. some of the EU structural funds or
international debt remission
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The financial account
 Transactions related to the purchase or
selling of financial assets
 Example:
 FDI
 Portfolio investments
 Short term and long term loans
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Statistical errors and omissions
 Various data sources concerning the debit and
the credit entries
Difficulties concerning services transactions data
collection
The financial account- specific statistical
difficulties
The division of statistical discrepancies
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Official reserve assets transactions
 The financial account
 Interventions on the FX market
 CB’s
 Governments (other assets than reserves)
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Official reserve assets transactions
 „The balance of payments”BP transactions except foreign reserve assets
transactions
 CA balance + CAP balance + FA balance
except foreign reserve assets transactions and
statistical errors and omissions
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The balance of payments
equilibrium
 According to the definition:
 CA balance+ CAP balance + FA balance=0
 In practice- errors and omissions
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The balance of payments
equilibrium
 Accounting and economic equlibrium
 Autonomous and compensatory
transactions
 The real equlibrium
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The international investment
position
 The net IIP- the difference between
foreign assets and liabilities
 IIP- a report about the foreign assets and
liabilities structure
 The analisis of the way investments are
being financed in an economy
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The international investment
position
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Foreign debt
 A part of the total debt in a country that is owed
to foreign creditors
 Debtors- Governments, companies, households
 „Sustanaible debt” – the level of the debt which
allows the debtor, to settle his accounts
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Foreign debt
 Foreign debt indicators:
 Debt/GDP
 Debt/exports
 Governement debt/ tax income
 Short term debt
 Debt service indicators
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The balance of payment analysis
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Preliminary conclusions
 CA deficit
 Deficit cause by trade in goods
 Services trade surplus
 FA surplus
 CA deficit is financed through the inflow of
investments
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Foreign debt indicators
 Debt to GDP 63,5%
 Short term debt to reserve assets 88%
 Short term debt to overall debt 27%
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Debt to GDP
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BP adjustment mechanisms
 Price adjustment mechanism
 Income adjustment mechanism
 Monetary adjustment mechanism
 Adjustment policy
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Price adjustment mechanism
 BP equilibrium reinstatment through price
changes
 Floating ERR
 Fixed ERR
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Price adjustment mechanism- fixed
ER
 Gold standard example
 The reinstatement of the BP equlibrium
follows the pattern of the gold standard
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Price adjustment mechanismfloating ER
 ER adjustments
 BP deficit  ER depreciation  relative decrease of the
domestic prices  decrease of imports, increase of
exports  the equilibrium is reinstated
 BP surplus  ER appreciation relative growth of
domestic prices  decrease of exports, increase of
imports  the equilibrium is reinstated
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The Marshall-Lerner condition
 Concerns only the CA
 ER changes may lead to the
reinstatement of the equilibrium only if the
sum of demand elasticity for imports and
exports is larger than one
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The Marshall-Lerner condition
 ηEx + ηIm >1 ER changes may reinstate
the equilibrium
 ηEx + ηIm =1  ER changes do not
influence the equilibrium
 ηEx + ηIm  ER changes deepen the
unequilbrium
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The Marshall-Lerner condition
 The imports and exports structure
 Various demand elasticities for various goods
 Industrial products- larger elasticity
 Raw materials- weaker elasticity
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The problem of inflationary
pressures
 Imports inflation
 The replacement of imports through
domestic production
 Increase of demands for exports 
growing production for export sales
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Income adjustment mechanism
 The interdependency between
consumption and income
 The marginal propensity to consume
 MPC= ΔC/ ΔY
 The influence of investments on income
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Income adjustment mechanism
 Multiplier mechanism
 The influence of consumption and
investment growth on income
 ΔY= ΔI/ MPS+MPI
 ΔY/ ΔI= 1/ MPS+MPI
 ΔY/ ΔI= 1/1-MPC+MPI
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Income adjustment mechanism
 Invetsment growth income growth 
imports growth
 Exports growth  income growth 
imports growth
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Income adjustment mechanism
 The dependence of the internal equilibrium on the
external equilibrium
 Exports growth exogenous?  it depends of the imports
growth abroad
 The imports growth abroad depends on the country’s
income
 Income growth in one country  increase of imports 
exports growth in the other country  income growth in
the other country
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Income adjustment mechanism
 The functioning of the mechanism
depends on MPI
 The multiplier works until the maximum
potential output is reached
 The decrease of the income or imports
triggers a reversed multiplier
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Examples
 Great depression 1923-1933
 The 90-ties crises (Brasil, Russia)
 The fianancial and economic crisis 20082009
 A positive multiplier- South-East Asia
countries
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The monetary adjustment
mechanism
 Reinstatement of the equilibrium through
influencing the relation between money
demand and supply
 BP equlibrium as a monetary
phenomenon
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The monetary adjustment
mechanism
 Money supply surplus  increase of expenses
 price growth  imports growth, exports
decrease  BP deficit  foreign reserve asstes
decrease  money supply decrease  price
decrease exports increase, imports decrease
 the equilibrium is reinstated
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The monetary adjustment
mechanism- fixed ER
 The goals of the mechanism and the
economic policy are contradictory 
sterilisation
 The mechanism is disabled
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The monetary adjustment
mechanism- floating ER
 Money supply surplus  increase of expenses  price
increase  imports increase, exports decrease  BP
deficit  depreciation  price increase  money
demand increase the monetary equilibrium
reinstated BP equilibrium
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Summing up
 Invetsments in an open economy may be
financed through foreign savings
BP is a schedule of transactions between
residents and nonresidents during a
specified period of time
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Summing up
 The BP construction
 BP and IIP as a tool of economic analysis
 Automatic adjustment mechanisms
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Refernces
 Balance of payments and international investment position manual, sixth edition, IMF,
2008
 P. Krugman, M.Obstfeld, International economics: theory and policy, Pearson,
Addison Wesley, Boston 2009.
 F. Breuss, Robinson and Marshall-Lerner conditions with positive import content of
exports, European Economic Review, 1984
 A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2004,
 A. Rose,The role of exchange rates in a popular model of international trade: Does
the ‘Marshall–Lerner’ condition hold?, Journal of International Economics,1991,
 K. Sauernheimer, Theorie der Aussenwirtschaft, Verlag Vahlen, Munchen 2006.
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