Transcript The Balance of Payments

The Balance of Payments
Definition and structure
Balance of payments
• overall view of transactions with the
rest of the world.
• Made up of three separate
accounts
• Current Account
• Capital Account
• Financial Account
Balance of Payments – Current Account
• It is a record of all money flows from
international transactions between the Kz and
the rest of the world
• Trade in Goods
• Trade in Services
• Investment Income
• Capital Transfers
Trade in Goods (visibles)
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Consumer Durables
Capital Goods
Commodities
Components
Foodstuffs and Beverages
Services (invisibles)
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Tourism
Financial Services
Insurance
Music and entertainment
Banking
Financial Account: Investment Income
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Investment in companies overseas,
And their investment in us
FDI Foreign Direct Investment.
Other investments e.g. Loans to banks.
Capital Transfers
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Transfer of money between individuals
Kazakhs working overseas
Grants to overseas countries
Contributions to International organisations e.g.
IMF, World Bank and WTO.
Capital Account
• Acquisition or disposal of Non produced or non
financial assets.
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Capital transfer credits
Donation from Canada to Tanzania for schools
Dr from Canada Cr to Tanzania
Capital transfer debits
UK to finance an Airport St. Helena.
Debt forgiveness
• If Rwanda relieved of its debts = Cr in Rwanda’s
capital account.
• If a bank in Switzerland , which made a loan to
government of Sierra Leone waived that debt =
Dr in Switzerland’s Capital Account.
Foreign Exchange Reserves
• If there is a deficit in the Balance of Payments
the government will draw on reserves to rectify
the deficit and support the exchange rate.
Current Account
Prepare the balance of payments for the country whose
international exchanges are shown in the table below
Category
Balance/billion
s$
Imports of goods
Import of services
export of goods
export of services
income
current transfers
direct investment
portfolio investment
capital transfers
550
400
380
550
-130
70
40
-80
90
transactions in non produced non financial assets -25
reserve assets
a.
balance of payments
b.
Prepare the balance of payments for the country whose
international exchanges are shown in the table below
Category
Balance/billion
s$
Imports of goods
Import of services
export of goods
export of services
income
current transfers
direct investment
portfolio investment
capital transfers
550 CA
400 CA
380 CA
550 CA
-130 CA
70 CA
40 FA
-80 FA
90 Cap Ac
transactions in non produced non financial assets -25 Cap Ac
reserve assets
a.
balance of payments
b.
Calculate the following balances
i
current account
-80
ii
financial account
-40
iii
capital account
65
iv
reserve assets
55
v
balance of payments
0
UK Deficit Narrows
of which: EU £3.2
non-EU -£10.9
Trade in Goods Deficit Widens
Prepare the balance of payments for the country whose
international exchanges are shown in the table below
Category
Balance/billion
s$
Imports of goods
Import of services
export of goods
export of services
income
current transfers
direct investment
portfolio investment
capital transfers
550
400
380
550
-130
70
40
-80
90
transactions in non produced non financial assets -25
reserve assets
a.
balance of payments
b.
Consequences for Japan Balance of
Payments Surplus
• Positive Current Account balance.
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Country has a high demand for exports
High demand for local currency
Leads to appreciation of currency value
Makes M cheaper
Consequences for USA of a Balance of
Payments Deficit
• Negative Current Account Balance
• Means that another part of the account must be
in surplus to create a balance of money.
• The magnitude of the deficit is important,
measured as a % of GDP
How to fix a large Current Account
Deficit
• Encouraging people
to buy locally
produced products.
• Devalue currency
• Reduce AD.
Demand & Supply side causes of
deficit
• Short-term factors eg Strong consumer
demand –
• Leads to a very high level of demand for
imported goods and services
• UK consumers have a high income elasticity
of demand for overseas-produced goods
Demand & Supply side causes of
deficit
• The strong sterling exchange rate in the past
has helped to reduce the UK price of imports
causing expenditure-switching effect
• weakness of the global economy and in
particular the very slow growth in the Euro Zone
has damaged UK export growth.
causes of deficit in UK
• 55% of all UK X go to EU
• shifts in comparative advantage (China)
• The availability of cheaper M inevitably
causes a substitution effect from British
consumers
Causes of deficit
• Weak product innovation and R & D
• The UK manufacturing sector has been in longterm decline for more than twenty years.
• Lack of productivity, inflexible labour market
Implications of a deficit
• There is a net outflow of demand and income from the
circular flow of income and spending.
• The current account need not balance as long as the
financial account is in surplus – need to attract
investment, savings etc
• The UK has run large current account deficits in with
barely any effect on the overall economy.
• Small chance of speculative selling of sterling on the
foreign exchange markets
Implications of a deficit
• If the deficit is due to very strong consumer
demand, it automatically self corrects when the
economic cycle turns
• increased imports of new capital & technology
which improves productivity in LR could cause
deficit – not a problem
• A widening trade deficit may result in lost output
& employment because it represents a net
leakage.
Implications of a deficit
• Foreign investors may eventually take fright,
lose confidence and take their money out.
• Deficit represents an S>D of the currency in the
foreign exchange market
• can lead to a  Price therefore exchange rate
WILL A DEPRECIATION OF THE CURRENCY LEAD TO THE
ELIMINATION OF A BALANCE OF TRADE DEFICIT?
Surplus
on the
current
account
Time
Deficit on
the
current
account
Net
improvement
Point when
currency
depreciates
terms of trade
• = the rate of exchange of one good or service for
another when two countries trade with each
other.
Terms of Trade Index
• ToT = 100 x Average export price index /
Average import price index
• If export prices  faster than M prices, .
•  D X  and D M 
• If import prices  faster than export prices,
the terms of trade have deteriorated
Plenary
• On your boards write two important things you
have learned about the Balance of Payments.