Transcript The Balance of Payments

•Balance of payments
•Trade deficits and surpluses
•Foreign exchange markets
þBOP accounting is the recording of transactions between domestic
and foreign economic agents.
þAny transaction that results in a receipt of money by domestic agents
from abroad is recorded as a credit in the BOP accounts.
þAny transaction that entails the payment of money by domestic units
to foreigners is recorded as a debit in the BOP accounts.
þThe current account records foreign transactions involving
merchandise and services.
þThe financial account records foreign transactions involving financial
assets and land.
•Net investment income abroad: Investment
earnings by U.S. residents minus investment
earnings by foreign residents from their assets in
the United States
•Net unilateral transfers abroad : The unilateral
transfers (gifts and grants) received abroad by U.S.
residents minus the unilateral transfers U.S.
residents send abroad
U.S. balance of payments for 2006 (billions of
dollars)
Current Account
1.
2.
3.
4.
5.
6.
7.
8.
9.
Merchandise exports
Merchandise imports
Merchandise trade balance (1+2)
Service exports
Service imports
Goods and services balance (3+4+5)
Net Investment Income from abroad
Net unilateral transfers
Current account balance (6+7+8)
+1,023.1
- 1,861.4
- 838.3
+422.6
- 342.8
- 758.5
+36.6
- 89.6
- 811.5
Financial Account
10. Change in U.S. owned assets abroad
11. Change in foreign-owned assets in U.S.
12. Financial account balance (10+11)
13. Statistical discrepancy
TOTAL (9+12+13)
- 1,059.1
+1,888.4
+829.3
- 17.8
0.0
4
As you can see, the United
States had a large current
account deficit in 2006
U.S. imports have exceeded U.S. exports since
1976, and the trade deficit has widened
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U.S. trade deficit in 2006 by country or region
U.S. imports more goods from each of the world’s major economies than it exports to them.
The largest U.S. trade deficit is with China, which exported five times more to the United
States in 2006 than it imported from the United States.
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Figure 2: Percent of U.S. Trade Deficit Accounted
for by Selected Countries/Areas
OPEC Countries
Japan
China
South and Central America
2007
Latin America
1999
Euro Area
Mexico
Canada
0
5
10
15
20
Percent
25
30
35
40
If Wal-Mart was a
country, it would be
China’s seventh largest
trading partner
An exchange rate is the price
of one national currency
expressed in terms of another national
currency. For example, the dollar
price of the British pound is $1.49 -meaning it takes $1.49 to buy 1 pound
If the dollar price of the British pound ($/£) is:
$1.49 = £1
Then the pound price of the dollar (£/$) is given by
the reciprocal of the dollar-pound exchange rate.
That is:
1
 0.67 pounds
£/$ =
1.49
Exchange Rates are Determined by the Supply
& Demand for Foreign Exchange
Supply of
euros
Dollars per Euro
1.26
Demand
for euros
0
E*
Euros
Why do agents want to
exchange dollars for euros ?
•To purchase European-made goods and
services.
•To purchase stocks in European companies
companies or other euro-denominated assets.
•To speculate on future exchange rate
movements.
Exchange rate (dollars per euro)
The foreign exchange market
The fewer dollars needed to
purchase 1 unit of foreign
exchange, the lower the price of
foreign goods, the greater the
quantity of foreign goods
demanded, and the greater the
quantity of foreign exchange
demanded. The D curve slopes
downward.
S
$1.30
1.25
1.20
D
0
800
Foreign exchange
(millions of euros)
An increase in in the exchange rate makes US products cheaper for foreigners. The
increases demand for US goods implies an increase in the quantity of foreign
exchange supplied. The S curve slopes upward.
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Exchange rate
(dollars per euro)
Effect on the foreign exchange market of an
increased demand for euros
The intersection of the demand curve
for foreign exchange, D, and the
supply curve for foreign exchange, S,
determines the exchange rate. At an
exchange rate of $1.25 per euro, the
quantity demanded of euros equals
the quantity supplied.
S
1.27
1.25
D’
D
0
800 820
Foreign exchange
(millions of euros)
An increase in the demand for euros from D to D’ increases the exchange
rate from $1.25 to $1.27 per euro.
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The dollar has strengthened against the euro
recently
Exchange Rates and the Prices of Imported
Goods
Question: Suppose the dollar
price of a new Harley
Davidson is $22,000. How
much would a German buyer
have to pay in euros?
Euro price of the Harley
Euro price = dollar price of the Harley × euro price of the dollar
Thus, at the current exchange rate (€ 0.79 = $1) we
have:
Euro price = $22,000 × 0.79 = € 17,380
An appreciating dollar makes
U.S.-made goods and services
less price-competitive
Example: Let the dollar appreciate against the
euro
The new exchange rate is € 1 = $1
Thus we have:
Euro price = $22,000 × 1.00 = €22,000
Exchange rates and the Affordability of Imported
Goods
The euro price of a Krups coffee maker
is €45.00
Question: What is the price of the
coffee maker expressed in dollars?
If the dollar price of one euro is
$1.26, then:
$Price = (1.26)(45) = $56.70
Effect of an appreciating dollar on the price of imported
goods
What if the dollar should appreciate, or
gain value, against the euro?
Let the dollar price of the euro to
decrease to $1.00 .
Question: What is the dollar price of
the Krups coffee maker?
$ price = (1.00)(45) = $45.00
In late June 2007, a Big Mac cost more in the US
than in most other countries
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