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Ca balance &_iip

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Ca balance &_iip Ca balance &_iip Presentation Transcript

  • Principles of International EconomicsProf. Birgit EitelGeorg‐Simon‐Ohm Hochschule of Applied SciencesAhmad Abo-Obid6th June 2011SS 2011
  • 1- Current account Definition Components Cases Factors Cause Deficit Deficit is Good or Bad Policies Reduce Deficit Concept of Deterioration2- International investment position Definition Important3- Case Study 10-4 Current Account Balance & International Investment Position 2
  •  one of primary components of the balance of payments. the sum of thebalance of trade (exports minus imports of goods and services)net factor income (such as interest and dividends)net transfer payments (such as foreign aid). one of major measures of the nature of a countrys foreign trade. Current Account Balance & International Investment Position 3
  • Current account surplus and deficit Current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows. Current account deficit means imports of goods and services, and outflows are greater than exports and inflows. Current Account Balance & International Investment Position 4
  • Factors which cause a current account Deficit in the balance of Payments Fixed Exchange RateIf the currency is overvalued, imports will be cheaper and therefore there will be a higher Q of imports. Economic GrowthIf there is an increase in AD and National Income increases, people will have more disposable income to consume goods. If domestic producers can not meet the domestic AD, consumers will have to imports goods from abroad. Decline in Competitiveness.If exports become less competitive, due to lower productivity then demand for exports fall. This is likely to explain a long term deficit. E.g. the UK has lost comparative advantage for the manufacture of many goods to Asian countries like China. Current Account Balance & International Investment Position 5
  •  Higher inflationThis makes exports less competitive and imports more competitive. Recession in other countries.If the UK’s main trading partners experience negative economic growth then they will buy less of its exports, worsening the current account. Borrowing moneyIf countries are borrowing money to invest. Current Account Balance & International Investment Position 6
  • Current account deficit is good or bad? It depends on whether the borrowed funds are used to pay for consumption or investment. a deficit is not necessarily a bad thing for an economy, especially for an economy in the developing stages or under reform: an economy sometimes has to spend money to make money. However, a problematic deficit can result if a government has not planned out a sound economic policy and used its debts for consumption purposes, not future growth. Current Account Balance & International Investment Position 7
  • Policies to reduce a balance of Payments Deficit Devaluation.This involves lowering the value of the currency against others. DeflationIf government reduces AD by raising interest rates or increasing taxes then people will have less money to spend so they reduce consumption of imports. Supply Side PoliciesThese can improve the competitiveness of the economy and exporters, but this will take time to have effect ProtectionismIncreased tariffs will reduce imports and improve the current account. Current Account Balance & International Investment Position 8
  • Deterioration in the current account means that the value of exports has increased at a slower rate than the value of imports. Therefore there could have been an increase in the deficit or the surplus could have changed into a deficit. Current Account Balance & International Investment Position 9
  •  Measures the total amount and the distribution of a nation’s assets abroad and foreign assets in the nation at the end of year. Summarizes one nation’s overall quantity of assets and liabilities against the rest of the world. Shows whether the nation is a net debtor or a net creditor. Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances. Current Account Balance & International Investment Position 10
  • 3- Case Study 10-4: The Deterioration of U.S Current Account Balance &Net International Investment Position • From the table, we see that the U.S net international position deteriorated sharply from +$366 billion at the end of 1980 to -$223 billion in 1990. • The amount of U.S. assets abroad increases but Foreign assets in the U.S increased at double. • Important points from Table 10.5. :  First, U.S become a net debtor nation.  Second, U.S assets abroad are smaller than foreign assets in U.S . Table 10.5. The U.S IIP, Selected Years: 1980-2000 Current Account Balance & International Investment Position 11
  • 3- Case Study 10-4: The Deterioration of U.S Current Account Balance &Net International Investment Position Figure 10.2:  shows the sharp increase in the U.S. current account deficit after 1997 and its net international investment position after 1999.  Shows that the U.S. net investment position become negative (making the U.S a net debtor nation) in 1986 and increased so rapidly after 1999 as to make the U.S the world’s most indebted nation in 2006.  The U.S. had small CA surpluses only in 1980, 1981, and 1991, and CA deficits in all other years, and CA deficits increased rapidly after1997.  The U.S. NIIP was positive until 1986 and negative thereafter, and itFigure 10.2 U.S CAB & NIIP, 1980-2006(billion dollars) increased sharply after 1999. Current Account Balance & International Investment Position 12
  •  US consumer spending has been rising :So the US has been increasing the value of imports bought into the economy. Decline in competitiveness :US manufactured goods have been losing comparative advantage to Asian economies. Dollar Relatively High compared to current account deficit:Dollar has not devalued as much as you would expect for an economy with a large current account deficit. The US has remained an attractive location for Capital investment.Therefore the inflow of capital has financed the current account deficit and has encouraged America to keep buying imports and the low interest rates from the inflow of capital have encouraged consumer borrowing and spending. Current Account Balance & International Investment Position 13
  • Thank you for listening Current Account Balance & International Investment Position 14
  •  [1] Herman E. Daly, Joshua Farley, Ecological Economics: Principles And Applications, Island Press, 2003 [2] Carbaugh,Robert,“The Balance of Payments“, International Economics, 9th Edition, South-Western, 2004, Chap. 11 [3]Salvatore, Dominick, “Balance of Payments”, Introduction to International Economics, 2th Edition, 2005. Chap. 10 [4] Heakal, Reem, “Understanding The Current Account In The Balance Of Payments”,[Article published online: http://www.investopedia.com/articles/03/061803.asp]. [5] Heakal, Reem, “Current Account Deficits: Government Investment Or Irresponsibility? ” [Article published online: http://www.investopedia.com/articles/04/012804.asp]. [6] Ghosh, Atish , „Do Current Account Deficits Matter? “Article published December 2006, Volume 43, Number 4 online: http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm]. [7]Pettinger, Tejvan, „Factors which cause a current account Deficit in the balance of Payments” [Article published online: http://www.economicshelp.org/macroeconomics/bop/cause-of-deficit.html]. [8]Pettinger, Tejvan, „ Policies to reduce a balance of Payments Deficit“[Article published online: http://www.economicshelp.org/macroeconomics/bop/policies-to-reduce-deficit.html] [9]Pettinger, Tejvan, “What Causes the US Current Account Deficit.” “[Article published online: http://econ.economicshelp.org/2007/03/what-causes-us-current-account- deficit.html] Current Account Balance & International Investment Position 15