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
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
BALANCE-OF-PAYMENT CATEGORIESSources 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 accountb. Capital accountc. Financial account
BALANCE-OF-PAYMENT CATEGORIES
4. Balance-of-payment Measuresa. Definitions:1. Basic Balancefocuses 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 BalanceMeasures 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 Linkagesset 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
and investment (I)NS = C + I (2)
THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITALc. 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 CAPITALC. THE LINK BETWEEN THE CURRENT AND
CAPITAL ACCOUNTS1. Beginning identity
Y - E = X - Mwhere X = exports M = imports
X-M = current account balance (CA)
2. Combining S - I = X - M
3. If S - I = Net Foreign Investment (NFI)NFI = X - M
D. GOVERNMENT BUDGETS AND CURRENT ACCOUNT DEFICITS
1. CURRENT ACCOUNT BALANCE
CA = Saving Surplus - Gov’t budget deficit2. CA Deficit meansthe 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. Currency DepreciationB. ProtectionismC. Ending Foreign Ownership of Domestic AssetsD. Current account deficit and unemployement
CURRENCY DEPRECIATIONA. 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
TIME
Net changein trade balance
0
Currency depreciation
Trade balance initially deteriorates
Trade balanceimproves
COPING WITH THE CURRENT ACCOUNT DEFICIT
B. PROTECTIONISMA. Trade Barriers used:
1. Tariffs2. Quotas
B. Results:Most likely will reduce both X and M.
C. Ending Foreign Ownership of Domestic Assetsone protectionist solution would place limits on or eliminate foreign ownership leading to capital inflows.
Continue...D. Current account deficit and unemployement is dilemma in our country, because have pro and contra argument.