Transcript current account deficit

Balance of
Payments
What is it?
A
record of all financial dealings between
economic agents of one country and the
rest of the world.
 This
is not a measure of government
spending.
 This
can be split into two components.
 Flows
of money into a country have a
Positive (+) sign. This is due to exports.
 Flows
of money out of a country have a
negative (-) sign. Because of imports.
 The
Current Account
 The
Capital and Financial Accounts
The Current Account
 This
has three parts.
The Current Account
 Trade
in goods
 Visible
or tangible goods such as shoes,
copper, rice, cars and spaceships.
 Export minus imports of goods = balance
of trade
The Current Account
 Trade
in services
 Invisible
or intangiable services – banking,
insurance, call centres and tourism.
 American
London?
tourist staying in a British hotel in
 Japanese
tourist flying an American airline
to Prague?
A
British tourist staying in a Slovakian hotel
in Houston, Texas?
Current Account Transfers
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•
Current transfers include things such as profits,
dividends and interest earned abroad.
With current transfer, no good or service
changes hands.
So, a British woman earns interest on her Swiss
bank account – that is a current transfer.
Dividends paid to a Swiss businessman on
shares held in the New York stock exchnage.
That’s a current transfer.
 When
we consider invisible goods, visible
goods and current transfers we get the
Current Account Balance of Payments.
The Capital and Financial
Accounts
 Foreign
direct investment (FDI) refers to
long-term capital investment, such as the
purchase or construction of machinery,
buildings, or whole manufacturing plants.
If foreigners are investing in a country, that
represents an inbound flow and counts as
a surplus item on the capital account.
The Capital and Financial
Accounts
 Portfolio
investment refers to the purchase
of shares and bonds.
 Other
investment includes capital flows
into bank accounts or provided as loans.
The Capital and Financial
Accounts
 Reserve
account. The reserve account is
operated by a nation's central bank to
buy and sell foreign currencies.
Current Account Deficits and
Surpluses
 The
balance of payments must always
balance.
 However
there can be surpluses and
deficits in certain parts of the account.
 Demonstrate
on Board.
 This
is the same as a household.
 How
can a household spend more than it
makes?
Current Account Deficits and
Surpluses
 An
economy can spend more than it
earns if it borrows money from abroad.
 It
can have a current account deficit,
where exports are less than imports by
running a surplus on it`s capital account.
Causes of Changes in Current
Account Balance
 Change
in Exchange Rate- A rise in the
exchange rate may decrease exports
and increase imports.
 However:
 Depends
on the price elasticity of
demand for the import/export.
Causes of Changes in Current
Account Balance
 Many
goods and services are specific to
a certain country.
 Exporters
can gain an advantage by
improving or distiguishing their products
from others.
Causes of Changes in Current
Account Balance
 The
importance of income and current
transfers varies from country to country.
 For
some countries a huge amount of
their income comes from their citizens
earning incomes abroad and sending
them home.
Current Deficits and Surpluses
 Current
account deficits are generally
seen as bad.
 Surpluses
are generally seen as good.
Current Account Deficits and
Surpluses
 The
size of the account deficit or surplus is
important in determining it`s signifigance.
Large Sustained Current
Account Deficits
 These
are bad because they can
become unsustainable.
 This
 The
has to be payed for.
level of borrowings increases or the
level of savings and investments held
abroad decreases.
Large Current Account
Deficits
 There
may come a point when lenders
think that borrowers will default on their
loans and stop lending them money.
Large Sustained Current
Account Deficits

The level of the deficit needs to be
compared against the rate of GDP
growth.
 If
GDP Growth is larger than the deficit,
there may not be a problem.
Large Current Account
Surpluses
 Governments
could keep their exchange
rates artificially low.
 China
 This
increases exports but makes imports
more expensive.
Large Current Account
Surpluses
 Strong
exports help create jobs and boost
economic growth.
 This
could build up a countries net wealth.
Large Current Account
Surpluses
 Disadvantages
 Reduce
what is available for consumption
domestically.
Large Current Account
Surpluses
 Disadvantages
 Can
cause friction between countries.
 Countries
can only reduce current
account deficits if other countries reduce
current account surpluses.
Governement

The current account deficit is not paid for
by the government.
 Government
borrowing is not the same as
a current account deficit.
 Generally
a deficit is caused by
transactions involving individuals and
firms.