10/13/20151 outline 2: the balance of trade, balance of payments (bop) and international...
TRANSCRIPT
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Outline 2: The Balance of Trade, Balance of Payments (BOP) and International
Macroeconomics
2.1 Introduction to the Balance of Trade and Payments
2.2 International Macroeconomics
2.3 Conclusions on BOP
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2.1 Introduction to the Balance of Trade and Payments
• BOP:– Summary financial statement of a nation’s
transactions with the world
– 3 Accounts:• Current Account (X-M)
• Capital Account (ΔK)
• Official Reserves Account (ORA)
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2.1 Introduction to the Balance of Trade and Payments
• BOP: NotationX = domestic currency value of exports,M = domestic currency value of importsΔ K = domestic currency value of net capital
outflows (capital investment to other countries)ORA = official reserves account settlement (assume
this is 0 for US BOP analysis; its very small as non-US trading partners want to hold $’s
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2.1 Introduction to the Balance of Trade and Payments
• BOP: Double-Entry Bookeeping(X-M) + Δ K+ ORA = 0 BOP Accounting Identity:
Current account plus capital account sum to 0 as US ORA assumed equal to 0.
(X-M) > 0 current account trade surplus(X-M) < 0 current account trade deficit(X-M) = - Δ K Deficit in current account is offset by
net capital inflows; foreigners buy assets with US $.
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2.1 Introduction to the Balance of Trade and Payments
• Current Account: reflects net flow of goods and services (exports and imports), income, and unilateral transfers
• Capital Account: – reflects public and private lending and investment
activities– Portfolio (maturities >1 year), direct investment
(equity >10%), short-term investment (< 1 year) criteria
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2.2 International Macroeconomics
• Relationship Between Macro-Economy and BOP:Notation:
Y = GDP or $ value of national output or aggregate supply
C = national level of consumption expenditures
S = national level of savings
I = national level of investment
Yd = national level of expenditures or aggregate demand
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2.2 International Macroeconomics
Relationship Between Macro-Economy and BOP:
Y = C + S consume or save output
Yd = C + Iexpenditures are consume or invest
Y – Yd = S - I capital surplus invested abroad
S > I leads to –ΔK or capital outflow
S < I leads to + Δ K or capital inflow
Y – Yd = X – M excess of output sold to foreigners
S – I = X – M net foreign investment = trade surplus
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2.2 International Macroeconomics
Relationship Between Macro-Economy and BOP:
X > M leads to S > I Trade surplus leads to positive net foreign investment or capital outflows
X < M leads to S < I Trade deficit leads to negative net foreign investment or capital inflows
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2.2 International MacroeconomicsRelationship Between Macro-Economy, BOP, and Government Deficits:
Government budget deficit occurs when government spending for a year is greater than tax receipts.
Yd = (C-T) + I + G where: T=tax receipts, G=gov’t spending,and (C - T) is private consumption
Y - Yd = (S - I) - (G - T)
X – M = (S – I) - (G - T) Government deficits worsen current account balance and have foreign capital inflows to finance gov’t deficit.
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2.2 International Macroeconomics
• What does this all mean?– Nation that produces more than it spends saves more than it
invests, exports more than imports, and has a capital outflow.
– Nation that produces less than it spends saves less than it invests, imports more than exports, and has a capital inflow.
– Nation with a gov’t deficit will exacerbate trade deficits and capital inflows.
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2.3 Conclusions on BOP
• What does this mean for FX rates?– A trade deficit (home goods too expensive)• Appreciation of domestic currency and a fall in FX rate
(e)
– A trade surplus (home goods cheap• Depreciation of domestic currency and a rise in FX rate
(e)
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2.3 Conclusions on BOP
• US has consistent trade deficits.• US has consistent gov’t. budget deficits:– National debt = Sum{all past budget deficits}– National debt is about $17b
www.treasurydirect.gov– 26% (46% of 57% of debt held by public) of US
gov’t. bonds held by foreigners (mainly Saudi Arabia, China & Japan)
• US long-term savings rate (< 5%) is low (relative to Japan at > 20%).
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2.3 Conclusions on BOP
• The US trade deficit has been driven by a strong dollar due to high demand for safe US stocks and bonds:– Foreigners bought US assets thereby bidding up
value of $– US bought foreign goods/services with FX from
sale of $ helping to drive trade deficit.– Capital account is driving the current account in
US.