Transcript Slide 1
September /October 2007
The Balance of Payments
A record of the value of all the transactions
between the residents of one country of one
country with the residents of all other countries
in the world over a given period of time.
Trade in goods
Trade in services
Income flows
==> Current Account
Trade in assets and liabilities
==>Capital Account
Balance of Trade
Current Account
Balance of trade in goods = visible trade balance = balance
of trade
Balance of trade in services = invisible balance = net
services
= >Revenue received from the exports of services minus the
expenditures on the Imports of services
Net income flows, as a result of financial investment
abroad
- Net investment incomes (dividends, interest and profits)
Transfers of money (sending money, aid, taxes and
payments to the EU, gifts)
Trade in Goods
Trade in Goods
Manufactured Goods
Energy Products
Semi-finished products
Raw Materials
Consumer and Capital Goods
Trade in Services
Trade in Services
Banking and Insurance
Consultancy
Tourism
Transport and Shipping
Education
ETC.
Current Account
Imports represent an
Outflow of money
Outflow (-)
Exports represent an
Inflow of money
Inflow (+)
Capital Account: Old way
Assets = anything that can be owned and that has value
(land, real estate, stocks, treasury bills, government
bonds, foreign currency, bank deposits.
Buying property, purchasing a business, buying
stocks or shares
Assets that represent lending
Treasury bills, bonds, savings account deposits
Official reserves: in gold and in foreign currencies
Introducing the Financial
account
Capital account now keeps track of
+ the flows of funds into the country (credits) and out of
the country (debits), ASSOCIATED WITH THE
ACQUISITION OR DISPOSAL OF FIXED ASSETS
(land)
+ the transfers of money by migrants,
+ the payments of grants by the government
The Financial account
Records the flows of money into and out of the
country for the purpose of investment or as deposits in
banks and other financial institutions.
1. Investment (direct and portfolio)
2. Other financial flows
3. Flows to and from the reserves
Capital account records the flows of funds into and out
of the country associated with the acquisition or disposal
of fixed assets,
Net Errors and Omissions
Balance of payments = Balance sheet
That means that IT MUST BALANCE!!!!
Official reserves: in gold and in foreign currencies make up
the difference
WHY does it not always balance???
Mistakes, failure to record all items, generally due to a
time delay can lead to a small discrepancy
Current Account Balance
Capital Account Balance
Net Errors and Ommisions
Net Balance of Payment
+
+
+
=0
Balance of payments
The UK Balance of Payments on Current Account 1998 - 2004
Source: ONS (http://www.statistics.gov.uk/cci/nugget.asp?id=194)
(Crown copyright material is reproduced with the permission of the
Controller of HMSO and the Queen's Printer for Scotland.)
Current Account Deficit
Exercise: Make the BoP
For the Netherlands the following data is given about
1999 (I know it’s old but I learned economics with
these data)
Exports of goods: 157 billion
Imports of goods: 142 billion
Exports of services: 52 billion
Imports of services: 45 billion
Received incomes : 40 billion
Payed incomes: 36 billion
Exercise: make the BoP
Received transfers: 4 billion
Payed transfers: 10 billion
Direct investments in NL: 31 billion
Direct investments abroad by Dutch firms: 39 billion
Portfolio investments in NL: 71 billion
Portfolio bought abroad: 74 billion
Loans taken: 5 billion
Loans given: 4 billion
Grants received: 1 billion
Grants paid by the government: 1.6 billion
Exercise
What happened to the reserves in the Netherlands in
1999?
Exchange Rates
The rate at which one currency can be exchanged for
another e.g.
£1 = $1.90
£1 = €1.50
Important in trade
Exchange Rates
Converting currencies:
To convert £ into (e.g.) $
Multiply the sterling amount by the $ rate
To convert $ into £ - divide by the $ rate: e.g.
To convert £5.70 to $ at a rate of £1 = $1.90, multiply 5.70
x 1.90 = $10.83
To convert $3.45 to £ at the same rate, divide 3.45 by 1.90
= £1.82
Exchange Rates
Determinants of Exchange Rates:
Exchange rates are determined by the demand for
and the supply of currencies on the foreign
exchange market
The demand and supply of currencies is in turn
determined by:
Exchange Rates
Relative interest rates
The demand for imports (D£)
The demand for exports (S£)
Investment opportunities
Speculative sentiments
Global trading patterns
Changes in relative inflation rates
Exchange Rates
Appreciation of the exchange rate:
A rise in the value of £ in relation to other
currencies – each £ buys more of the other
currency e.g.
£1 = $1.85
£1 = $1.91
UK exports appear to be more expensive ( Xp)
Imports to the UK appear to be cheaper ( Mp)
Exchange Rates
Depreciation of the Exchange Rate
A fall in the value of the £ in relation to other
currencies - each £ buys less of the foreign
currency e.g.
£1 = € 1.50
£1 = € 1.45
UK exports appear to be cheaper ( Xp)
Imports to the UK appear more expensive
( Mp)
Exchange Rates
A depreciation in exchange rate should lead to a
rise in D for exports, a fall in demand for imports –
the balance of payments should ‘improve’
An appreciation of the exchange rate should lead
to a fall in demand for exports and a rise in
demand for imports – the balance of payments
should get ‘worse’ BUT
Exchange Rates
The volumes and the actual amount of income and
expenditure will depend on the relative price elasticity
of demand for imports and exports.
Exchange Rates
$ per £
S£
The
rise in
Assume
an in
Investing
demand
creates a
initial exchange
the
UK would
shortage
rate of £1in=the
now
be
more
$1.85.
There
relationship
are rumours
attractive
between
demand
that the UK is
for
£ and
supply
and
demand
going to
–for
the£price
would
increase
(exchange
rate)
interest rates
rise
would rise
1.90
1.85
D£1
Shortage
D£
Adapted from
www.bized.co.uk
Q1
Q3
Q2
Quantity on
ForEx Markets
Exchange Rates
Floating Exchange Rates:
Price determined only by demand and supply of the
currency – no government intervention
Fixed Exchange Rates:
The value of a currency fixed in relation to an anchor
currency – not allowed to fluctuate
Dirty Floating or Managed Exchange Rate:
– rate influenced by government via central bank
around a preferred rate
Exchange Rates
Purchasing Power Parity (PPP)
The relationship between the exchange rate and
the price level in different countries.
The price of £ in the foreign currency = Foreign Country
price level/UK price level
Exchange Rates
The exchange rate would be a proper reflection of the
purchasing power in each country if the relative values
bought the same amount of goods in each country.
E.g. If the price of a pint of Stella in the UK was £3.00
and in Europe €4.50, the exchange rate between the two
countries should be £1 = €1.50
If any lower than this value, the £ would be
undervalued and if any higher, the £ would be
overvalued.
The consequences of current and
capital account imbalances