Transcript International Finance

International
Finance
Balance of Payments
the record of all transactions
between the people of one
nation and the people of all
other nations.
U.S. International Transactions 2002
[Millions of dollars]
current account
Goods Exported
681,874
Goods Imported
-1,164,746
Balance on goods (Net Goods Exports = Gds Exp – Gds Imp)
-482,872
Services Exported
292,233
Services Imported
-227,399
Balance on services (Net Serv Exports = Serv Exp – Serv Imp)
Balance on goods and services (Balance of Trade)
Income receipts
Income payments
Balance on income (Net Income)
Net transfers
Balance on Current Account
Capital account transactions, net
64,834
-418,038
255,542
-259,512
-3,970
-58,853
-480,861
-1,285
Financial account
U.S.-owned assets abroad
Foreign-owned assets in the United States
Balance on Financial Account
Statistical discrepancy
Balance of Payments Total
-178,985
706,983
527,998
-45,852
0
In 1999, the Bureau of Economic Analysis
(BEA) made some changes in the way the
balance of payments is presented in order to
bring it into closer alignment with
international guidelines.
(Some books still use the old definitions.)
Parts of the Balance of Payments
Current Account:
Goods
Services
Income receipts & payments (from investments)
Transfers
Capital Account (Prior to 1999, this was part of Current Account.)
This is a very small account that includes debt forgiveness, and goods and
financial assets accompanying migrants when they enter or leave the country.
Financial Account (Prior to 1999, this was called the Capital Account.):
U.S.-owned assets abroad
Foreign-owned assets in the U.S
U.S. International Transactions 2002
Current account
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goods Exported
681,874
Goods Imported
-1,164,746
Balance on goods (Net Goods Exports = Goods Exp – Goods Imp)
-482,872
Services Exported
292,233
Services Imported
-227,399
Balance on services (Net Service Exports = Service Exp – Service Imp)
Balance on goods and services (Balance of Trade)
Income receipts
Income payments
Balance on income (Net Income)
Net transfers
Balance on Current Account
64,834
-418,038
255,542
-259,512
-3,970
-58,853
-480,861
Balance of Trade
difference between a country’s exports & imports
trade surplus: exports > imports
More goods & services going out of
the country than coming in.
goods
goods
trade deficit: imports > exports
More goods & services coming into
the country than going out.
goods
goods
To remember
what is a surplus and what is a deficit,
watch the money.
trade surplus
positive balance of trade:
more money coming into
the country than going out
money
money
trade deficit
negative balance of trade:
more money going out of
the country than coming in.
money
money
Current Account Surplus:
positive balance on current account
more money coming in than going out
Current Account Deficit:
negative balance on current account
more money going out than coming in
U.S. International Transactions 2002
[Millions of dollars]
__________________________________________________________________________________________________
Balance on Capital Account
-1,285
U.S. International Transactions 2002
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------_________-----------------------------------------------------------____--------------------------------------------------------------------------------
Financial account
U.S.-owned assets abroad
-178,985
Foreign-owned assets in the United States
706,983
Balance on Financial Account
527,998
Financial Account Surplus:
positive balance on financial account
more money coming in than going out
Financial Account Deficit:
negative balance on financial account
more money going out than coming in
In theory, the sum of the current and capital accounts
should balance with the financial account. The
sum of the balance of payments should be zero.
When a country buys more goods and services than
it sells (a deficit on the combined current and
capital accounts), it must finance the difference by
borrowing or selling more assets than it buys (a
surplus on the financial account).
When a country sells more goods and services than it
buys (a surplus on the combined current and
capital accounts), it uses the earnings of foreign
money to buy foreign assets or make loans to
other countries (a deficit on the financial account).
In reality, the accounts do not exactly offset
each other because of statistical discrepancies,
accounting conventions, and exchange rate
movements that change the recorded value of
transactions.
U.S. International Transactions 2002
[Millions of dollars]
----------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance on Current Account
Balance on Capital Account
Balance on Financial Account
Statistical discrepancy
-480,861
-1,285
527,998
-45,852
----------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance of Payments Total
0
U.S. International Transactions 2002
[Millions
of
dollars]
----------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current account
Goods Exported
681,874
Goods Imported
-1,164,746
Balance on goods (Net Goods Exports = Goods Exp – Goods Imp)
-482,872
Services Exported
292,233
Services Imported
-227,399
Balance on services (Net Service Exports = Service Exp – Service Imp)
Balance on goods and services (Balance of Trade)
Income receipts
64,834
-418,038
255,542
Income payments
-259,512
Balance on income (Net Income)
Net transfers
-3,970
-58,853
Balance on Current Account
-480,861
----------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Capital account transactions, net
-1,285
----------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Financial account
U.S.-owned assets abroad
Foreign-owned assets in the United States
-178,985
706,983
Balance on Financial Account
527,998
----------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statistical discrepancy
Balance of Payments Total
-45,852
0
Exchange Rate Systems
Gold Standard (1879-1934 excluding WWI years)
A
nation’s currency is defined in terms of a fixed
amount of gold. (Example: U.S. dollar might be worth
25 grams of gold & British pound might be worth 50
grams of gold.)
 A country must maintain a stock of gold to back up its
currency.
 The system implies a fixed rate of exchange between
the currencies of two countries. (Example: British
pound might be worth two U.S. dollars.)
 Problem: Gold supply must increase as quickly as the
world’s need for money.
Bretton Woods System (1934-1973)
 The
conference at Bretton Woods, N.H. established the
International Monetary Fund (IMF).
 The IMF supervised a system of fixed exchange rates,
which were based on the U.S. dollar, which was based
on gold.
(The U.S. dollar was used because the U.S. had the
largest stock of gold, and the largest and strongest
economy in the world.)
 Problem: Again the gold supply couldn’t keep up with
the world’s need for money.
Freely Floating Exchange Rate System
(1973 - present)
The exchange rates of currencies are based
on supply and demand for currencies.
(We’ll examine the ideas using the British
pound and the American dollar.)
The Demand Curve
As the price of a British pound in dollars falls,
British goods & services become cheaper to
Americans.
So the quantity of pounds demanded by Americans
to purchase those goods & services increases.
So we have an inverse relation between the price of
a pound and the quantity demanded of pounds.
So, the demand curve slopes downward.
Demand for British Pounds
exchange rate of dollars per pound
or the price of a pound in dollars
D
quantity of pounds
The Supply Curve
As the price of a British pound in U.S. dollars rises,
the British get more dollars for their pound.
So American goods & services become cheaper to
the British.
So the British are willing to supply more pounds to
get American goods & services.
We then have a direct relation between the price of
a pound and the quantity supplied of pounds.
So, the supply curve slopes upward.
Supply of British Pounds
exchange rate of dollars per pound
or the price of a pound in dollars
S
quantity of pounds
Market for British Pounds
exchange rate of dollars per pound
or the price of a pound in dollars
S
D
quantity of pounds
Market for British Pounds
exchange rate of dollars per pound
or the price of a pound in dollars
S
e*
D
q*
quantity of pounds
Converting Currencies
Recall that £ is the symbol for the British pound.
Suppose that $1 is worth £0.75.
You are in England and considering purchasing a
sweatshirt with a picture of Buckingham Palace.
The price is £30. You want to determine the
equivalent price in U.S. dollars.
Instead of trying to remember whether you should
multiply or divide to determine the answer to this
sorts of question, just remember to set up the
problem so the currencies cancel appropriately.
Problem: If $1 is worth £ 0.75,
how many U.S. dollars is £30 worth?
You start with £’s and want to finish with $’s.
So, set up the problem like this:
 $1 
£30  £30 
 $40

 £0.75 
Notice that you have a £ in the numerator and
denominator. So the £’s cancel and you’re left with
your $ in the numerator for your answer.
What if you were given the problem like this?
If $1 is worth £ 0.75,
how many British pounds is $40 worth?
Now you start with $’s and want to finish with £’s.
So, set up the problem like this:
 £0.75 
$40 = $40 
 £30

 $1 
Notice that you have a $ in the numerator and
denominator. So the $’s cancel and you’re left with
your £ in the numerator for your answer.