bvk if ppt-bop gold std int liq sdr mms.. 13

7/27/2019 Bvk if Ppt-bop Gold Std Int Liq Sdr Mms.. 13

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Balance Of Payment



Balance Of Payment



Importance of BOP



What is BOP

?

What is BOT?

Is BOP=BOT?



BOP Accounts



Current Account



Capital Account



Statistical Discrepancies



Official Reserves to IMF



BOP Identity



Balance Of Payment



Country A:

Imports Widget

Country B:

Exports Widgets

Exchanges Currency-Sells own Currency

To buy Country B’sCurrency to Pay for Widget

Creates a supply of

Country A’s currency Causing value toDecrease

Creates Demand for

Country B’s Currency Causing value toIncrease



Disequilibrium in BOP

A country’s balance of payments is indisequilibrium when there is no perfect equality

between the demand and supply for foreign

exchange.

Disequilibrium may take place either in the formof deficit or in the form of surplus.



Types of Disequilibrium in BOP

Structural Disequilibrium

Cyclical disequilibrium

Technological Disequilibrium Short run Disequilibrium

Long run or Secular Disequilibrium

Monetary Disequilibrium



Population Growth

Development Programs

Demonstration Effects

Natural Factors

Cyclical Fluctuations

Inflation

Poor Marketing Strategies Flight of Capital

Globalization

Causes of Disequilibrium in BOP



Monetary Measures for Correctingthe BOP

1. Deflation

2. Exchange Depreciation

3. Devaluation

4. Exchange Control



Non-Monetary Measures for Correctingthe BOP

1. Tariffs

2. Quotas

3. Export Promotion

4. Import Substitution



Limitations of BOP

Sources of information used to prepare BOP statementare varied namely central bank, institutions linked withexternal trade such as EXIM Bank, custom authoritiesetc.

A perfect coherence among these sources may not bepossible.

Thus the account Errors and Omissions serves to bringabout an equilibrium between economic operations andtheir monetary counterparts.



BOP statement is established in terms of transactioni.e. it takes into account transactions rather thansettlements.

BOP is expressed in national currency. But often theoperations have been done in other currencies. Thiscauses the problem of exchange gain or loss, whichis ignored. Countries like Japan prepare BOP in twocurrencies i.e. Yen and USD.

Limitations of BOP



GOLD STANDARD



A Monetary system of a country’s government which allowed to fix prices of its domesticcurrency in terms of a specified amount of gold.

Eg. $100 = 1 ounce of gold

then, $1 = 1/100 th of an ounce of gold

What is Gold Standard??



Gold was used as standard in 643 B.C. tocreate coinage.

Wealth = amount of gold a person holds.

Slowly the use of gold as money evolved, from

coins to paper redeemable by coins, to aconcept that was loosely tied to its value ingold.

History of Gold…



Gold standard was mainly used during the period of 1875 to 1914.(inter war period as well)

After World War II, a modified version of the goldstandard monetary system, the Bretton Woodsmonetary system created as its successor.

This successor system was initially successful, but because it also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon"closed the gold window."

Origin



Types of Gold Standard

Gold Specie Standard: the monetary unit isassociated with circulating gold coins, or with theunit of value defined in terms of one particularcirculating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal.

Gold Bullion Standard: a system in which gold coins

do not circulate, but in which the authorities haveagreed to sell gold bullion on demand at a fixed pricein exchange for the circulating currency.



Bimetallism

A combination of Gold and Silver standardis called as Bimetallism.

Silver standard was used in United States in1800s.

U.S. had bimetallism both gold and silverstandard.



Pros and Cons

PROS:

low level of inflation

Stability in Foreign Exchange Market

CONS:Stability

Very little scope for using monetary policy

Results:

contributed for the Great Depression of 1929

exchange rates did not respond in sync withcircumstances in countries



Recent Times

― Fiat Money‖- means money that isintrinsically useless; is used as a medium of exchange.

Then why does money have value???

value of money is determined by the –

“Supply and demand for goods and services in theeconomy”

The prices for goods and services are allowed tofluctuate based on ―Market Forces‖.



What is International Liquidity?

International liquidity is the part of the concept of international finance.

International liquidity is foreign currency or gold in

the reserve of any country. At micro level, you can understand international

liquidity as cash in your pocket for operation of business.



The concept of international liquidity is

associated with international payments. It refers to the generally accepted official

means of settling imbalances in

international payments. international liquidity comprises two

elements, viz., owned reserves and

borrowing facilities.



Source of Liquidity

Broadly, they can be classified into two categories:

Owned resources.

Borrowing facilities.

Wh t th P bl f I t ti l



What are the Problems of InternationalLiquidity?

The problem of international liquidity has two aspects:

Quantitative

Qualitative



ADEQUACY OF LIQUIDITY

C f I d f I t ti l



Causes of Inadequacy of InternationalLiquidity

total gold reserves have grown since 1950 at 1.4 percent per year; and total international liquidity at 2.7per cent per year, on the other hand, the world tradehas since 1950 grown at the annual rate of 7.5 percent per year.

2.Distribution of liquidity among the various

countries of the world is also very uneven. Somecountries have too much liquidity, -whereas othershave too little

C f I d f I t ti l



The supply of gold—one of the major components of liquidity —is very much limited and also cannot beincreased according to the needs.

Causes of Inadequacy of InternationalLiquidity



IMF AND INTERNATIONAL LIQUIDITY

The IMF is alive to the problem of shortage of international liquidity. Within the framework provided by its Articles, it is making all efforts toincreasing the supply of international liquidity. Themeasures-taken in this direction are;

(a)increase in quotas.

(b) allocation of SDRs. And

(c) introduction of new lending facilities andexpansion of existing facilities.



International Liquidity is a wider concept thaninternational reserves. It means resources availableto individual countries to meet their balance of payments deficits. In this context, various issues are

considered such as sources of liquidity, adequacy,IMF role and criticisms. The SDRs role and uses,

valuation and allocation of SDRs are highly related,in international liquidity

IMF AND INTERNATIONAL LIQUIDITY



SPECIAL DRAWING RIGHTS

SDR



The SDR is an international reserve asset, created by theIMF in 1969.

SDRs are allocated to member countries in proportion to

their IMF quotas.

As on March 2011 amount of SDR was 238.3 billion.

What Are SDR’s ?

h ’



Why SDR’s?

To support the Bretton Woods fixed exchangerate system.

The dominant constituents of international

reserves are:1.Government or central bank holdings of gold

2.Widely accepted foreign currencies (USD)

Inadequacy of these two key reserve assets,ledto creation of a new international reserveasset under the auspices of the IMF.



SDR Valuation

The value of the SDR initially defined as 0.888671 gramsof fine gold = one U.S. dollar.

After the collapse of the Bretton Woods system in1973,

SDR was redefined as a basket of currencies

Basket consists of:

Euro Japanese yen

Pound sterling U.S. dollar

The U.S. dollar-value of the SDR is posted daily on theIMF's website.

SDR V l ti (C d )



It is calculated as the sum of specific amounts of the four basketcurrencies valued in U.S. dollars, on the basis of exchange ratesquoted at noon each day in the London market.

In the most recent review (in November 2010), the weights of thecurrencies in the SDR basket were revised based on the value of theexports of goods and services and the amount of reservesdenominated in the respective currencies that were held by othermembers of the IMF.

The basket composition is reviewed every five years by the ExecutiveBoard

SDR Valuation (Cond…)



THURSDAY AUGUST 02,2012 RATES

CURRENCY Currency amountunder Rule O-1

Exchange rate 1 U.S. dollarequivalent

EURO 0.4230 1.22710 0.519063

JAPANESE YEN 12.1000 78.22000 0.154692

POUNDSTERLING

0.1110 1.55500 0.172605

U.S.DOLLAR 0.6600 1.00000 0.660000

1.506360

U.S.$1.00 = SDR 0.663852

SDR1 = US$ 1.50636

SDR I t t R t



SDR Interest Rate

The SDR interest rate provides the basis for calculating:

Interest charged to members on regular (non-concessional)IMF loans

Interest paid and charged to members on their SDR holdings and charged on their SDR allocations.

The SDR interest rate is determined weekly.

Is based on a weighted average of representative interestrates on short-term debt in the money markets of theSDR basket currencies.

J l J l



July 23 to July 29

currency Currency amountunder rule0-1

A

Exchangerate againstthe SDR B

Interest rateC

Product(A*B*C)

EURO 0.4230 0.810239 -0.0020 -0.0007

JAPANESE YEN

12.1000 0.0084334 0.1000 0.0102

U.K.POUNDSTERLING

0.1110 1.04268 0.2700 0.0312

US DOLLAR 0.6600 0.66413 0.0900 0.0394

TOTAL 0.0801



SDR Allocation to IMF Members

Allocation of SDR is based on the proportion IMFquotas of the members.

If a member's SDR holdings rise above its

allocation, it earns interest on the excess If it holds fewer SDRs than allocated, it pays

interest on the shortfall.

Ki d Of All ti



Kinds Of Allocation

General Allocations

Special Allocations

R t Fi



Recent Figures

GENERAL ALLOCATION

SPECIAL ALLOCATION

TOTAL

UNITED STATES 27539.1 2877.0 30416.2

GERMANY 9643.1 1205.3 10848.4

CHINA 5997.3 755.6 6752.9

RUSSIA 4407.4 1264.4 5671.8

INDIA 3082.5 214.6 3297.1



BUYING AND SELLING OF SDR

IMF acts as an intermediary between members andprescribed holders to ensure that SDRs can be exchangedfor freely usable currencies.

For more than two decades, the SDR market has functionedthrough voluntary trading arrangements

In the event that there is insufficient capacity under the

voluntary trading arrangements, the Fund can activate thedesignation mechanism

bvk if ppt-bop gold std int liq sdr mms.. 13

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