Transcript The Balance of Payments and International Trade Linkages

The Balance of Payments and International Trade
Linkages
Organization
• BOP Accounting/ Balance of Payment Categories
• National Income Accounting and International Trade
• Trade Balances: Problem (?) and Solution
Balance of Payment Accounting The purpose is to
measure the flow of economic transactions over a
period of time. The conventions of double-entry
bookkeeping are used to keep track of what’s going on.
• Credit: anything that leaves the country such as an export
good. (It makes sense to think of this as a credit since it
triggers payments coming into the country.)
• Debit: anything that comes into the country payments to
foreigners
Example An American trades a Mike Modano bobblehead doll to a Canadian for 3 pounds of seal oil.
• Credit: bobble-head Mike
• Debit: Seal oil.
Example: An American sells the doll for $200
accepting a check from the Canadian buyer
• Credit: the doll
• Debit = $200 (remember, anything that comes into the country
is a debit, even if it is a financial asset, like an IOU)
Example: An American buys $200 worth of seal oil,
paying with a check.
• Credit = $200 demand deposit liability (the IOU is now going
to a Canadian)
• Debit: the oil
Example: Honda buys a $50 M parts warehouse in
California.
• Credit: $50 M building (of course the building isn’t physically
moved from the US to Japan, but the title that asset is
transferred out of the US)
• Debit: $50 M liability (the check)
Example: An American sells 5 billion yen to the U.S.
Federal Reserve for $50 million. (Think about why the
Fed might be interested in buying these yen).
• Credit: $50 million DD liability owned by a private citizen
(the funds are no longer controlled by a private citizen)
• Debit: $50 million “official reserves” (to be defined more
carefully later).
Balance of Payment Accounting convention is to assign
every entry into one of three broad class
• Current Account:
• Capital Account
• Official Reserves
Current Account
• Goods
• Services (e.g., tourism, transportation, professional services,
and interest)
• Unilateral transfers (e.g., government grants and private
remitances).
• Current Account Balance (BCA) =Credits-Debits Capital
Account: Purchases and sale of assets
Capital Account
• Foreign Direct Investment: The acquisition of control over
business enterprise in other country
• Portfolio Investment:
• Long Term: Assets with maturity greater than one year (e.g.,
stocks and LT bonds)
• Short Term: less than one year
• Other Investments: currency transactions, bank deposits and
other trade credits
• Capital Accounts Balance (BKA)=Credits-Debits
Official Reserve Account: Central Bank Transactions in
International Reserve Assets Including
• Foreign exchange
• gold
• “Special Drawing Rights” (SDR’s) a special kind of reserve
asset created by the International Monetary Fund
• IMF reserve positions
• Official Reserve Balance (BRA)=Credits-Debits
Balance of Payments Accounting Identity
• Since credits must equal debits, BCA +BKA + BRA = 0
• Interesting observation: if BRA = 0, then BCA = - BKA
Example US exports $300 Billion and is paid by
accepting $300 billion in credit from the foreigners
• Credit $300 (CA)
• Debit $300 (KA)
Example: US imports $225 billion and pays by writing
checks on foreign bank accounts
• Credit $225 (KA)
• Debit $225 (CA)
Example: US corporations pay $15 billion in dividends
to foreigners by writing checks on US banks
• Credit $15 (KA)
• Debit $15 (CA)
ExampleUS tourists spend $30 billion in travelers
checks while abroad
• Credit $30 (KA)
• Debit $30 (CA)
Example: US investors buy $60 billion in foreign
stocks, paying with checks drawn on foreign banks
accounts
• Credit $60 (KA)
• Debit $60 (KA)
Observation from the example
•
•
•
•
BCA = 300 – (225 + 15 + 30) = $30
BKA = (225+15 + 30 + 60)-(300+60) = -$30
It would seem that BKA = -BCA
And of course, this makes sense as an exercise in accounting
identities. In the example all the transactions involve current
or capital account items and since the accounting rules require
that debits must equal credits this identity has to obtain.
But this also makes good economic sense.
• The stuff we get from foreigners has to be paid for somehow.
It can be paid for by giving them our stuff, or by giving them
financial assets (which are just claims on some undetermined
stuff).
• If we exported just as much as we imported (that is, if we
paid for their stuff with our stuff), the current account would
balance would be zero.
• If we import more than we export, we pay by giving them
complicated pieces of paper (called financial assets) which
define some claim they have on our stuff .
Complication: what if we want more of their stuff than
they want of our stuff, but they are unwilling to accept
private financial assets in payment? Suppose
• US imports $100 billion and pays by writing checks on US
banks
• Credit $100 (KA)
• Debit $100 (CA)
• Notice that at this point, BCA = -100 and BKA = 100
Complication (Cont.) But now suppose those foreigners
decide they don’t want to hold US demand deposit
liabilities and instead buy something from the Federal
Reserve, say gold or their own currency.
• Credit $100 (OR)
• Debit $100 (KA)
• Notice that now BCA = -100, BKA = 100-100 = 0 and BRA
=100
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
$2.8
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
$2.8
In 2004, the
U.S. imported
more than it
exported, thus
running a
current account
deficit of
$665.9 billion.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
$2.8
During the
same year, the
U.S. attracted
net investment
of $611.2
billion—clearly
the rest of the
world found the
U.S. to be a
good place to
invest.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
$2.8
Under a pure
flexible
exchange rate
regime, these
numbers would
balance each
other out.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
$2.8
In the real
world, there
is a statistical
discrepancy.
U.S. Balance of Payments Data
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$1,516.2
($2,109.1)
$16.4
($89.4)
($665.9)
$115.5
$794.4
$524.3
$611.2
51.9
$2.8
($248.5)
($90.8)
($483.7)
Including that,
the balance of
payments
identity should
hold:
BCA + BKA = – BRA
$2.8
($665.9) + $611.2 + $51.9 = ($2.8)
Current Account Deficit, Private Savings and the
Budget Deficits
To understand all of this consider the sources and uses
of funds in three increasingly complex worlds
A world where there is no international trade and no
government.
• Sources: Producing consumer goods (C) and capital goods (I)
• Uses: Consuming and saving (S)
• Conclusion: C+I=C+S, or S=I
A world where there is international trade, but no
government
• Sources: Producing consumer goods, capital goods,
government goods,and exports (X)
• Uses: Consuming, saving, paying taxes and imports (M)
• Conclusion: C+I+X=C+S+M or X-M=(S-I)(I.e., CA=net
private saving)
A world with government and trade
• Sources: Producing consumer goods, capital goods,
government goods,and exports (X)
• Uses: Consuming, saving, paying taxes and imports (M)
• Conclusion: C+I+G+X=C+S+T+M or X-M=(S-I)-(G-T) (I.e.,
CA=net private saving - budget surplus)
Are Current Account Deficits Bad?
• Bilateral deficits can be interesting but hardly relevant to
issues beyond political and economic relationships between
the countries.
• Multilateral CA deficit can be interpretted as
– An indication that the home country is dissaving (spending more
on I and G than S and T)
– An indication that the home country is a good place for foreigners
to invest (remember a CA deficit means that capital is flowing into
the home country).
Balance of Payments Trends
• Since 1982 the U.S. has experienced continuous deficits on the
current account and continuous surpluses on the capital
account.
• During the same period, Japan has experienced the opposite.
Balances on the Current (BCA) and Capital (BKA) Accounts of
the United States
U.S. Balance of Payments Trend: 1982-2004
600
400
200
U.S. BCA
0
-200
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Balance of Payments ($B)
800
-400
-600
-800
Year
Source: IMF International Financial Statistics Yearbook, various issues
U.S. BKA
Balances on the Current (BCA) and Capital (BKA) Accounts of
United Kingdom
40
30
20
10
0
-20
-30
-40
-50
Source: IMF International Financial Statistics Yearbook, various issues
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-10
UK BCA
UK BKA
Balances on the Current (BCA) and Capital (BKA) Accounts of
Japan
150
100
50
Japan BCA
-100
-150
Source: IMF International Financial Statistics Yearbook, various issues
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-50
1982
0
Japan BKA
Balances on the Current (BCA) and Capital (BKA) Accounts of
Germany
80
60
40
20
0
-40
-60
-80
-100
Source: IMF International Financial Statistics Yearbook, various issues
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-20
Germany BCA
Germany BKA
Balances on the Current (BCA) and Capital (BKA) Accounts of
China
60
50
40
30
China BCA
20
China BKA
10
-20
Source: IMF International Financial Statistics Yearbook, various issues
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-10
1982
0
Balance of Payments Trends
• Germany traditionally had current account surpluses.
– From 1991 to 2001Germany experienced current account deficits.
– This was largely due to German reunification and the resultant need
to absorb more output domestically to rebuild the former East
Germany.
– Since 2001 Germany returned to its earlier pattern.
• What matters is the nature and causes of the disequilibrium.
Balances on the Current (BCA) and Capital (BKA) Accounts of
Five Major Countries
800
China BCA
600
China BKA
Japan BCA
400
Japan BKA
200
Germany BCA
0
1980
-200
Germany BKA
1985
1990
1995
-400
-600
Source: IMF International Financial Statistics Yearbook, 2000
2000
2005
UK BCA
UK BKA
U.S. BCA
U.S. BKA
How to fix a CA deficit (if you want to)
• Protectionism of various sorts (such as quotas and tarrifs), but
– Tariffs and quotas may provoke trading partners to institute
similar policies, reducing exports.
– Tariffs and quotas discourage efficient exchange, lowering national
income and reducing exports
• Domestic monetary policy
– Raising interest rates
– Controlling inflation
Can devaluations work? (The “J-Curve)
• A devaluation raises the price of imports and so discourages
the volume of imports (e.g., the German car that cost $50,000
before the devaluation might cost $55,000 after)
• But, the imports have a higher dollar value and so if the
volume of imports drops by a smaller percentage than the price
of imports, the dollar value of imports may actually increase,
worsening the CA deficit.