Wednesday, May 11, 2016

UNIT 7

Balance of Payments

4/27/16

Balance of Payments: 
- Measure of money inflows and outflows between the United States and the Rest of the      
  World (ROW). 
  • Inflows are referred to as CREDITS
  • Outflows are referred to as DEBITS 
- The Balance of Payments is divided into 3 accounts:
  1. Current Account
  2. Capital/Financial Account
  3. Official/Reserves Account

Current Account: 
Balance of Trade or Net Exports
    - Exports of Goods/Services
    - Exports create a credit to the balance 
      of payments
Net Foreign Income 
    - Income earned by U.S. owned foreign assets - income paid to foreign held U.S assets
• Net Transfers 
    - Foreign Aid : a debit to the current account
    - Ex: Mexican migrant worker sends money to Mexico




Capital/ Financial Account: 
  • The balance of capital ownership
  • Includes the purchase of both real and financial assets 
  • Direct investment in the United States is a credit to the capital account
            - Ex: The Toyota Factory in San Antonio
  • Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account 
            - Ex: The Intel Factory in San Jose, Costa Rica.
  • Purchase of foreign financial assets represents a debit to the capital account 
            - Ex: Warren Buffet buys stock in Petrochina 
  • Purchase of domestic financial assets by foreigners represents a credit to the capital account 
             - Ex: The UAE sovereign wealth fund purchases a large stake in the NASDAQ


Relationship between Current Account & Capital Account:

  • The Current Account and the Capital Account should zero each other out
  • That is... If the Current Account has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus)

Official Reserves:
  • The foreign currency holdings of the U.S. Federal Reserve system
  • Balance of payments surplus ---> Fed accumulates foreign currency and debits the balance of payments
  • Balance of  payments deficit ---> Fed depletes its reserves of foreign currency and credits the balance of payments
  • Official reserves zero out balance of payments 

Active v. Passive Official Reserves:

  • The U.S. is passive in its use of official reserves. If does not seek to manipulate the dollar exchange rate. 


Formulas: 
Balance of Trade
  • Goods Exports + Goods Imports 
Balance of Goods & Services 
  • Goods Exports + Service Exports + Goods Imports + Service Imports
Current Account: 
  • Balance of goods & services + Net Investments + Net Transfers 
Capital Account:
  • Foreign Purchases + Domestic Purchases 




5/3/16
Foreign Exchange (FOREX):
  • The buying and selling of currency.
  • Any transition that occurs in the Balance of Payments necessitates foreign exchange.
  • The exchange rate (e) is determined in the foreign currency market. 

Changes in Exchange Rates:
  - Exchange rates (e) are a function of the supply and demand for currency.
  • ⬆Supply of a currency ----> ⬇in exchange rate of a currency 
  • ⬇Supply of a currency ----> ⬆in exchange rate of a currency
  • ⬆Demand for a currency ----> ⬆in exchange rate of a currency
  • ⬇Demand for a currency ----> ⬇in exchange rate of a currency 
Appreciation & Depreciation: 
  • Appreciation: When the exchange rate of that currency ⬆ (e⬆) 
  • Depreciation: When the exchange rate of that currency ⬇ (e⬇) 

Exchange Rate Determinants:
  • Consumer Tastes
  • Relative Income
  • Relative Price Level
  • Speculation 

Exports and Imports: 
  • Appreciation: U.S. goods --> more expensive 
                           Foreign goods --> cheaper          = Reduces exports and increasing imports


  • Depreciation: U.S. goods --> cheaper 
                   Foreign goods --> more expensive     = Increasing exports and reducing imports

Flexible Rates:
  • It s very sensitive to the business cycle ans it provides options for investments 

Fixed Rates: 
  • It is based on a countries willingness to contribute currency and control the amount. 

Absolute Advantage: 
  • Individual: Exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources)
  • National: Exists when a country can produce more of a good/service than another country can in the same time period. 

Comparative Advantage:
  • A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner. 



Examples of Output Problems: 
  1. Words per minute
  2. Miles per gallons
  3. Tons per acre
  4. Apples per tree
  5. Televisions produced per hour

Examples of Input Problems: 
  1. # of hrs to do a job
  2. # of acres to feed a horse
  3. # of gallons of paiHbnt to paint a house


Specialization and Trade: 
  • Gains from trade are based on comparative advantage, not absolute advantage. 



No comments:

Post a Comment