Upload
bpfanpage
View
710
Download
2
Tags:
Embed Size (px)
Citation preview
Ch1/BP&ER 1
Balance of Paymentsand
Exchange Rates
Ch1/BP&ER 2
Introduction: Open vs closed economy
Three kinds of openness:
• Free trade in goods and services
Restrictions: , etc.
• Free movements of capital (financial) Restrictions:
• Free movements of factors: plants, labor
Restrictions:
Ch1/BP&ER 3
Various Measurements of openness
• EXPORTS/GDP or IMPORTS/GDP
• (EXPORTS + IMPORTS)/GDP
• TRADABLES/GDPTradables are goods that compete with foreign goods
on either domestic or foreign markets e.g.
This last ratio (high for the US) reflects the fact that if a country is competitive it does not need to import much.
Ch1/BP&ER 4
X/GDP (in 2000) US 11% UK 27% Belgium 84% Japan 10%
China 23%
Some determinants of openness:
Geographical: how far a country is from specific
marketsSize: the extent of the range and choice of goods
produced domestically
Ch1/BP&ER 5
Differences between international trade and international macro
International trade Based on micro
• Full employment of factors
• Total C = total Y each year
• Value of imports = values of exports
• Relative prices (T/T)
International macro Based on macro• Economy can be
_____ PPF• S and b
at country level• Trade can be --
balanced• Price ________
Ch1/BP&ER 6
AThe Balance of Payments
• The national income accounts revisited (econ 301)
• The balance of payments accounts
Ch1/BP&ER 7
National Income Accounts - Review
In principleValue of Production = Value of income
HoweverGNP ≠ National Income
Because
• GNP does not subtract economic depreciation
• Income includes gifts from abroad
• National income is based on prices producers receive while GNP is based on prices purchasers pay
difference = indirect taxes
Ch1/BP&ER 8
GNP - Deprec + Net unilateral transfer - indirect taxes = Natl Y
with: net unilateral transfer = gifts to us - gifts from us
Ch1/BP&ER 9
Gross domestic product vs gross national product
• GDP is the value added ________ - ignoring who owns the factors of production - i.e. income generated by activity within the border
• GNP is the value added by __________ owned factors of production - i.e. total income received by domestic residents
GDPless income on assets owned by foreigners in the countryplus income on assets owned by US residents abroad
equal GNPIf a country invests heavily abroad: GNP GDPIf a country uses a lot of foreign labor: GDP GNP
Ch1/BP&ER 10
GNP = GDP + Net receipts of factor income from ROW
US Resonly
GDP GNP
US Res+
Non US Resin country
US ResIncome
generatedabroad
Includes incomegenerated by foreign
owned wealth and foreign labor.
US owned factor income
so includes income on US wealth invested
abroad andincome to US workers
abroadRes stands for residents
Ch1/BP&ER 11
The Balance of Payments• Definition: Record of the transactions
between residents and residents a year.
• Double entry accounting:– Credit entry: any transaction that gives rise to a
payments (by the foreigners) and that is a payment +
– Debit entry: any transaction that gives rise to a payments (to the foreigners) and that is a payment -
Ch1/BP&ER 12
Characteristics of B/P
• 2 types of international transactions:– Exports (sales) and imports (purchases) of goods & services
accounts CA– Sales and purchases of assets
accounts FA– Balance = sales - purchases
• book keeping– 2 sides to all transactions– one entry (+) and one entry (-)– so Sum of credits (+) + Sum of debits (-) = 0
i.e. BP = 0
Note: A section called the capital account was created recently to complement the shift from GNP to GDP
Ch1/BP&ER 13
I Current Account
• Affects income ( as )• Measures direction and size of
CA > 0 S - country is a CA < 0 D - country is a
So CA = ∆ in a country’s foreign assets (or debt)C + I + G is absorption or demand for
goods (produced at home or imported)Y - (C + I + G) =
i.e. if a country consumes more than it produces, it must from abroad as it runs a CA
Ch1/BP&ER 14
Intertemporal interpretation
• Borrowers must repay their debt in the future• A country with a CA deficit imports present
consumption and exports future consumption
Other interpretations• Chronic CA deficits result in large foreign debt
and high interest payments on the debt which further erode the CA
• Chronic surpluses could have inflationary effects
Ch1/BP&ER 15
National saving and the CA
By definition
• Closed economyas Y = C + I + G in equil: Sn =
• Open economyas Y = C + I + G + CA in equil: Sn =
Open economy saves by building capital stock (I) by investing abroad (if CA >0)
(A country can invest more than its saving by borrowing from abroad thus
running a CA deficit)
€
€
Sn ≡ Y - C - G
Ch1/BP&ER 16
Private and government saving: The twin deficit
• Sp and Sg by definitionand national saving Sn Sp + Sg = Y - C - G• In equilibrium Sn = I + CA
Sp + Sg = I + CASp = I + CA - Sg = I + (EX - IM) + (G - T)
So private saving can 1. Finance private investment2. Allow the country to invest abroad3. Finance the budget deficit
Ch1/BP&ER 17
Current Accounts Breakdown
• Exports and imports of goods and services– Exports are entries ( )– Imports are entries ( )
• Services are sometimes called » Insurance - banking services - shipping
• Investment income received ( ) and paid ( )– Interest - - etc.– Net = investment income received less inv. inc. paid
• Unilateral Transfers (net) – One sided transaction: Gifts to us ( ) and gifts from us ( )– Net = Gifts to us - gifts from us
Ch1/BP&ER 18
Various balances• Exports of goods less imports of goods:
the balance on goodsso-called the trade balance
• Exports of services less imports of services:the balance on services
• Exports of goods and services less imports of goods and services:
the balance of ( or net exports)
• Balance of trade + net investment income + net unilateral transfer:
the balance on or
Ch1/BP&ER 19
II Capital and Financial Account
A Capital Account
• capital transfers (migrant labor financial transfers and debt forgiveness)
• transactions in non-produced and non-financial assets (transfer of ownership in natural resources, intellectual property rights, franchises and leases)
Total amount is not very large.
Ch1/BP&ER 20
B Financial account
• Correspond to in stock of assets - so they are (thus consistent with current accts).
• Some are and other are accounts.
• Some are term and some are term type of assets.
• Some are and some are government transactions; – the government transactions can be broken down
further into Central Bank and non Central Bank .
Ch1/BP&ER 21
Financial Account summary• US owned assets abroad (net changes)
– Increase is a US of foreign stocks/bonds
– So a financial
– So a (-)
• Foreign owned assets in the US (net changes)– Increase is a of US assets to foreigners
– So a financial
– So a (+)
Ch1/BP&ER 22
Financial Account detail
• US owned assets abroad (increase is (-))– US official reserves assets (net)
• Gold - SDR - foreign currencies
– US government assets
– US private assets• Direct investment (FDI)• Foreign securities• Credit balance in foreign bank and non-bank
institutions
Ch1/BP&ER 23
• Foreign owned assets in the US (increase is (+))– Foreign official assets in the US (net)
• US Treasury Securities - bank balances
– Other foreign assets in the US (as above)• FDI• US Treasury securities (gov’t bonds)• Other stocks and bonds• US currency• Bank balances in US bank and non-bank
institutions
Ch1/BP&ER 24
• Net capital account transactions+ {net increase in foreign owned assets in the US
less abs. value1 of net increase in US owned assets abroad}
= Capital and financial account balance FA
1. Because they are entered as a minus in BoP
• Statistical discrepancy{ - [Current account balance + Capital and financial account
balance]}If there was no mistakes or underreporting, the sum of the 2
balances should be equal to zero.
Ch1/BP&ER 25
Overall Interpretation
• CA balance measures in country’s net foreign assets (e.g. a surplus - CA > 0 - corresponds to lending to ROW)
• So this will be reflected in the FA balance where purchases of foreign assets will be ________ than sales of foreign assets.
• In sum a positive CA balance will be matched by a FA balance of same absolute value
Ch1/BP&ER 26
Examples of US balance of payments entries
Alitalia buys a Boeing 747 and pays with a check from Banco di Lavoro– Credit: of Boeing (3)
accounts – Debit: in US owned private asset
abroad or in US claims reported by US banks (54)
accounts
Ch1/BP&ER 27
The US government sends food as relief to famine stricken Mali
– Credit: of food (3)
accounts
– Debit: (gift from us) (36)
accounts
Ch1/BP&ER 28
A French citizen buys shares of Microsoft and pays by drawing his account at the Key Bank
– Credit: in foreign owned private assets in the US (64)
accounts– Debit: in US liabilities reported
by US banks (69) accounts
Ch1/BP&ER 29
BExchange Rates
Ch1/BP&ER 30
Various Exchange Rates
Nominal exchange rate - E• Definition: the price of the foreign currency in
terms of the domestic currency so it is quoted as ________ of units of domestic currency
in ____ unit of foreign currency• It fluctuates overtime
– Appreciation of the domestic currency: units are needed to buy 1 unit of the foreign currency
– Depreciation of the domestic currency: units are needed to buy 1 unit of the foreign currency
Ch1/BP&ER 31
Examples of ER fluctuation• January 1999 $1.17/€• September 2000 $0.85/ €• May 2002 $0.91/ €• May 2003 $1.14/ €• September 2007 $1.41/€
The euro depreciated by some 27% against the dollar in its first 18 months and appreciated by some 25% from 2002 to 2003. The euro has continued to appreciate steadily since.
Ch1/BP&ER 32
Law of One Price
2 countries - each produces one good– Switzerland produces calculator - price: 100SF– US produces book - price: $25– Nominal exchange rate: E = $.50/SF
• So price of Swiss calculator in $ is 100 * .50 = $50
– The real exchange rate RER is:
€
RER =Pr iceofSwissgoodin$
Pr iceofUSgood($)=
50
25= 2
€
RER =PSinSF * E$ /SF
PUSin$
=100SF * .50$ /SF
$25= 2
Ch1/BP&ER 33
Real Exchange Rate
• The real exchange rate is a relative price of 2 goods (calculator and book) indicating that
Swiss calculator = US books
i.e. US books can be exchanged for (or buy) Swiss calculator
• With more than one good, the meaning will be slightly different. We will need to use the aggregate price of a basket of goods (the price level or CPI) in each country and the RER will become the relative price of the 2 baskets.
Ch1/BP&ER 34
RER cont.
• We now have
• The meaning is similar: the RER indicates how many (units of a) US basket(s) can be exchanged for 1 foreign basket (P* is the foreign price level).
• If either E or P or P* change, we will have a real appreciation or a real depreciation.
€
RER = ε =PS *E$ /SF
PUS
or ε =EP*
P
Ch1/BP&ER 35
Real appreciation and depreciation• When the RER drops, we have a real i.e.
the US needs to give up US baskets to acquire foreign basket. This is a real depreciation from the point of view of the other country.
• Since
A real appreciation can be caused by:a nominal (E drops)or/and an in the domestic price level (P incr) or/and a in the foreign price level (P* drops)€
ε =EP*
P
Ch1/BP&ER 36
Effect of the real appreciation on trade
• Swiss goods become expensive for Americans (less than 2 US baskets to buy one Swiss basket)– So demand for Swiss good - US Imports
• US goods become expensive for the Swiss (one Swiss basket buy fewer US baskets)– So demand for US goods - US Exports
• So the US the balance of trade (exports less imports) but the Swiss balance of trade because they experience a real depreciation).
Ch1/BP&ER 37
In Sum:
Effect of the real appreciation on trade:• imports are ________ and exports ___________• the balance of trade will __________• this results in a _______ in the country’s
international competitivenessA real depreciation has the opposite effect as
more domestic baskets are needed to buy one foreign basket and the balance of trade improves:
• this results in an _______ in the country’s
international competitiveness
Ch1/BP&ER 38
Illustration
• Between 1959 and 1985, inflation in Switzerland or Germany has not been as high as in France, so France (the French Franc) experienced a real appreciation with respect to these 2 currencies. However in the long run (over the years), the nominal exchange rate (F/DM or F/SF) also depreciated to account for these relative price changes.
Ch1/BP&ER 39
Multilateral or trade weighted ER
Up to now we only considered bilateral exchange rate i.e. the relative price of 2 currencies.
However one specific currency may appreciate with respect to another currency and depreciate with respect to a third currency: in one instance there will be a deterioration in its international competitiveness and in the other an improvement.
We need to develop a way to get the whole picture.
Ch1/BP&ER 40
Construction of a trade weighted ER
• The are constructed by the IMF - but there is more than one way to do it.
• The basic approach is– To transform each bilateral ER into an
(indeed you can’t add ER as they are expressed in different units)
– Decide on a year set as 100 and calculate an index series over time for each bilateral ER.
– Use a scheme to aggregate the various indices - usually the importance of trade with a specific country as a ratio of total trade.
Ch1/BP&ER 41
Calculation of a trade weighted indexfor the $ using pound and euro
Yr 0 index wght Yr 1 index wght
£/$ .70 100 .30 .75 107 .30
€/$ 1.15 100 .70 1.10 95 .70
TWindex
The dollar appreciates w/ respect to the pound and depreciates w/ respect to the euro, but overall the dollar depreciates. Note that w/ T-W exchange rates, an increase is an appreciation.
Ch1/BP&ER 42
Real multilateral or trade weighted ER
Evidently, it is also possible to calculate a real multilateral or trade weighted exchange rate. It suffices to calculate the original bilateral indices with the real bilateral exchange rates.