Chapter 10 balance of payment


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Chapter 10 balance of payment

  1. 1. International Finance International EconomicsBalance of Payments Chapter 10 1
  2. 2. ContentI. Balance of paymentII. Double-entry accountingIII. International payment processIV. Balance of Payments Structure a. Current Account b. Capital and Financial AccountV. U.S. Balance of PaymentsVI. Current account deficit and surplus 2
  3. 3. a. Current account deficit problem b . Continue to run current account deficit? c. Net Foreign Investment and the CurrentAccount Balance d. Business Cycles, Economic Growth, and theCurrent AccountVII. Global saving glutVIII. Balance of International Indebtedness a. United Stated as a Debtor NationIX. Summary 3
  4. 4. I. Balance of Paymentso Definition Balance of payments is a record of the economic transactions between the residents of one country and the rest of the word. An international transaction is an exchange of goods, services or assets between businesses, individuals, and governments of one country and those of another. 4
  5. 5. II. Double-Entry Accountingo All transaction are either credit or debit transaction.o Credit transaction – receipt of payment from foreigner. • merchandise exports • transportation & travel receipts • Income received from investments abroad • gifts received from foreign residents • Aid received from foreign governments • investment in U.S. by overseas residents 5
  6. 6. II. Double-Entry Accountingo Debit transactions - leads to payments to foreigners. • Merchandise imports • Transportation and travel expenditures • Income paid on investments of foreigners • Gifts to foreign residents • Aid given by the U.S government • Overseas investments by U.S residents 6
  7. 7. III. International Payments Process 210,000 won TV 7
  8. 8. IV. Balance of Payment Structure a. Current accounto Current account - refers to the monetary value of international flows associated with transactions in goods, services, income flows and unilateral transfers.o Merchandise trade balance – includes all goods that U.S. exports (Credit) or imports (Debit). o surplus (positive balance) implies exports > imports o deficit (negative balance) implies imports > exports 8
  9. 9. IV. Balance of Payment Structureo Goods and services balance – added services to the merchandise trade balanceo Unilateral transfers – include transfers of goods & services (gifts in kind) or financial assets (money gifts) between the U.S. and the rest of the world. 9
  10. 10. IV. Balance of Payment Structure b. Capital and Financial Accounto Capital and Financial Account– all international purchases and sales of real estate, corporate stocks and bonds, government securities and commercial bank deposits. 10
  11. 11. IV. Balance of Payment Structureo examples: • Direct investment – residents of one country acquire 10% or more of business in another country. • Securities – private sector purchases of short-and long-term debt securities. • Bank claims – loans, overseas deposits, acceptances, foreign commercial paper. • Bank liabilities – demand deposits, NOW accounts, savings deposits, CDs.o Official settlements transactions – movement of financial assets among official holders such as the U.S Fed and Bank of England. 11
  12. 12. V. U.S. Balance of Payments - 2006 (Billions of Dollars)oCurrent Account: Merchandise trade balance -$838.3 Exports 1,023.1 Imports - 1,862.4 Services balance 79.8 Travel and transportation, net -10.6 Military transactions, net -14.0 Royalties and license fees , net 35.9 Other services, net 68.5 Goods and Services balance -758.5 12
  13. 13. V. U.S. Balance of Payments - 2006 (Billions of Dollars) Income Balance 36.6 Investment income, net 43.1 Compensation of employees, net -6.5 Unilateral transfers balance -89.6 U.S Government grants -27.2 U.S Government pensions -6.5 Private remittances -55.9Current account balance -811.5oCapital and Financial Account Capital account transactions, net -$3.9 Financial account transactions, net 833.4 Statistical discrepancy -18.0Balance on capital and financial account 811.5 13
  14. 14. V. U.S. Balance of Payments 1980- 2006 (Billions of Dollars)o Trade deficits can decrease value of dollar and decreasing U.S. purchasing power abroad.o Trade deficits can also decrease employment in domestic industries but are offset by capital inflows generating employment in other industries 14
  15. 15. VI. Current account deficit and surpluso Current account and capital & financial account are not related, when one is in surplus the other must be in deficit.o Current account surplus means an excess of exports over imports of goods and services, investment income and unilateral transfers.o Current account deficit implies an excess of imports over exports of goods and services, investment income and unilateral transfers. 15
  16. 16. VI. Current account deficit and surplus a. Current Account Deficit a Problemo A current account deficit has little to do with foreign trade practices or any inherent inability of a country to sell goods in world market.o Current account deficits are not efficiently reversed by trade policies that attempt to alter the levels of import or exports.o Resulting debt is less problematic if funds are used for investment spending rather than consumption spending. 16
  17. 17. VI. Current account deficit and surplus b. Continuous to run Current Account Deficit?o no economic reason why current account deficit cannot continue indefinitely.o From 1820-1875, the U.S ran current account deficits almost continuously.o Two principles to reduce the deficit, first U.S has an interest in polices that stimulate for foreign growth and second, increased national saving than through reduced domestic investment 17
  18. 18. VI. Current account deficit and surplus c. Net Foreign Investment and the Current Account Balanceo current account surplus => excess of exports over imports => net supplier of funds (lender) => improves net foreign investment positiono current account deficit => excess of imports over exports => net demander of funds from abroad=> decline in net foreign investment positiono net borrowing: (G - T) + (I – S) = Current Account Deficit Government Private Private (net borrowing) Deficit Investment Saving 18
  19. 19. VI. Current account deficit and surplus d. Business Cycles, Current Account & Economic Growtho Business cycles => if rapid growth and employment => growing trade and current account deficits. And if slow output and employment growth => growing surpluses.o short run: recession => current account surplus • Saving and investment tend to fall. • imports tend to fall with overall consumption and investment demand. 19
  20. 20. VI. Current account deficit and surplus d. Current Account & Economic Growtho long run: rapid economic growth leads to current account deficits, whereas those with weaker economic growth have long-run current account surpluses. 20
  21. 21. VII. Global saving gluto Excess global savings hold interest rate down which allowed U.S. borrowing from: • corporate profits in Japan • savings greater than investment in China or China’s investment rate was the world’s highest by far, but its saving rate was even greater. • oil profits in the Saudi Arabia and Russiao Surge in savings, lowered interest rates have the potential to boost productivity and creates the problem of Fed’s control of economy. 21
  22. 22. VII. Global saving gluto U.S. absorbed an estimated 75% of excess world supply of savings in 2006o Concern: reduction in such investment in the U.S. will cause significant depreciation in the dollar and a substantial increase in interest rates 22
  23. 23. VIII. Balance of international indebtedness o Definition – a statment that summarizes a countrys stock of assets and liabilities against the rest of the world at a fixed point in time. o The balance of international indebtedness looks at short-and long-term investment positions of both private and goverment sectors of the economy. o Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances 23
  24. 24. VIII. Balance of international indebtedness 24
  25. 25. VIII. Balance of international indebtedness a. U.S. as Debtor Nation o net creditor – U.S. claims on foreigners exceed foreign claims on U.S. o net debtor – foreign claims on U.S. exceed U.S. claims on foreigners o reasons U.S. is net debtor: foreign investors placed more funds in the U.S. because of economic growth and political stability 25