International Economic Linkages and The Balance of Payments

By group 5 : Tiaradipa Amanda (1010532072) Yodra Suyama (1010532066)

CHAPTER OVERVIEW

I. BALANCE-OF-PAYMENT CATEGORIES II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL III. COPING WITH CURRENT ACCOUNT DEFICITS

BALANCE-OF-PAYMENT CATEGORIES
THE BALANCE OF PAYMENTS (B-O-P)
1. PURPOSE: Measures all financial and economic transactions over a specified period of time.

2.

Double-entry bookkeeping

a. Currency inflows = credits (earn foreign exchange)

b. Currency outflows = debits (expend foreign exchange)

BALANCE-OF-PAYMENT CATEGORIES
Sources of fund = decrease in assets or an increase in liabilities Uses of fund = increase in assets or an decrease in liabilities In example: Suppose a Batik Indonesia company exports 100 Batik to U.S at price of $100,000. At current rate Rp1= $9,800, this order is Rp.980.000.000 Debit Credit Batik Indonesia export Rp.980.000.000 Private foreign assets Rp.980.000.000

BALANCE-OF-PAYMENT CATEGORIES
3. Three principal balance- of payment categories : a. Current account b. Capital account c. Financial account

BALANCE-OF-PAYMENT CATEGORIES
4. Balance-of-payment Measures a. Definitions: 1. Basic Balance focuses on transactions considered to be fundamental to the economic health of currency. It includes the balance on current account and long term capital. 2. Net liquidity balance measures the change in private domestic borrowing or lending that is required to keep payments in balance without adjusting official reserves.

BALANCE-OF-PAYMENT CATEGORIES
3. Official Reserve Transactions Balance Measures adjustments required in official reserves to achieves balance-of-payments equilibrium.

THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

LINKS FROM INTERNATIONAL TO DOMESTIC FLOWS A. Global Linkages set of basic macroeconomic identities which link: domestic spending and production to saving, consumption, and investment behavior and thence to financial account and current account balances.

THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

B. Domestic Savings and Investment and

the Capital Account 1. National Income Accounting
a. National Income (NI) is either spent (C) or saved (S) NI = C + S (1) b. National spending (NS) is divided into personal spending C investment (I) NS = C + I (2)

and

THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

c. Subtracting (1) (2) NI - NS = S - I (3)

If NI >NS, S > I which implies that surplus ,capital spent overseas.

THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

C. THE LINK BETWEEN THE CURRENT AND CAPITAL ACCOUNTS
1. Beginning identity Y-E=X- M where X = exports M = imports X-M = current account balance (CA) Combining S - I = X - M If S - I = Net Foreign Investment (NFI) NFI = X - M

2.

3.

D. GOVERNMENT BUDGETS AND CURRENT ACCOUNT DEFICITS

1. CURRENT ACCOUNT BALANCE
CA = Saving Surplus - Govt budget deficit 2. CA Deficit means the nation is not saving enough to finance (I) and the deficit. 3. CA Surplus means the nation is saving more than needed to finance its (I) and deficit.

COPING WITH THE CURRENT ACCOUNT DEFICIT

A. B. C. D. Currency Depreciation Protectionism Ending Foreign Ownership of Domestic Assets Current account deficit and unemployement

CURRENCY DEPRECIATION A. U.S. Experience: Does not improve the trade deficit. B. Depreciations ineffective because 1. It takes time to affect trade. 2. J-Curve Effect states that a decline in currency value will initially worsen the deficit before improvement.

THE J - CURVE
Net change in trade balance
0 Trade balance improves

Currency depreciation

TIME

Trade balance initially deteriorates

COPING WITH THE CURRENT ACCOUNT DEFICIT

B. PROTECTIONISM
A. Trade Barriers used: 1. Tariffs 2. Quotas B. Results: Most likely will reduce both X and M.

C. Ending Foreign Ownership of Domestic Assets

one protectionist solution would place limits on or eliminate foreign ownership leading to capital inflows.

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D. Current account deficit and unemployement is dilemma in our country, because have pro and contra argument.