Transcript  BOP accounting is the recording of transactions between

BOP accounting is the recording of transactions between
domestic and foreign economic agents.
Any transaction that results in a receipt of money by
domestic agents from abroad is recorded as a credit in the
BOP accounts.
Any transaction that entails the payment of money by
domestic units to foreigners is recorded as a debit in the
BOP accounts.
The current account records foreign transactions
involving merchandise and services.
The capital account records foreign transactions
involving financial assets and land.
U.S. International Transactions, 1997
(millions of dollars)
Source: Bureau of Economic Analysis
(1)
(2)
(3)
(4)
(5)
(6)
(7)
a
The Current Account
U.S. Merchandise exports
U.S. Merchandise imports
Balance of trade in merchandise
Net U.S. exports of servicesa
Net investment income of the U.S.
Unilateral U.S. grants
Balance on Current Account
$679, 320
877,720
(198,400)
87,740
(5,320)
(39,690)
($155,670)
Includes travel, transportation, and other private
services.
U.S. International Transactions, 1997
(millions of dollars)
Source: Bureau of Economic Analysis
(1)
(2)
(4)
b
The Capital Account
Capital outflows(net increase $478,500
In U.S. assets abroad)b
Capital inflows (net increasec 634,170
In foreign assets in the U.S.)
Balance on capital account
$155,670
Includes U.S. official reserves( gold, currencies, IMF
reserves.
c
Includes foreign official assets.
Imports and Exports of the U.S., April to July, 1999
billions of current dollars
110
105
104
103
100
99
95
97
90
85
80
75
78
78
79
79
Exports
Imports
70
Apr-99
May -99
Jun-99
Mon th
Source: Dism al Scientist (www.dismal.com)
Jul-99
95
90
Exports
Imports
85
80
75
70
Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98
U.S. Trade in G oods (Exports), 1996
billio ns of do llars
Other
94.5 / 15.4%
Agric ultural prod.
61.5 / 10.0%
Capital goods
Industrial supplies
65.0 / 10.6%
137. 9 / 22.5%
Automotive
253. 1 / 41.4%
Source: Ec onomic Report of the President
U.S. Trade in Goods (Imports), 1996
billio ns of do llars
Petroleum
72.70 / 9.1%
Other
235.80 / 29.4%
Industrial supplies
136.80 / 17.0%
Automotive
Capital goods
128.90 / 16.0%
Source: Economic Report of the President
229.00 / 28.5%
Current Account balance of selected industrialized nations,
August 1998 to August 1999
Australia
Britain
Canada
Current Account
(billions of U.S.
dollars)
-8.1
-38.9
16.2
France
Germany
Japan
Netherlands
23.1
72.8
122.9
14.2
Sweden
U.S.
16.8
-276.7
Country
Source: The Economist
An exchange rate is the price
of one national currency
expressed in terms of another national
currency. For example, the dollar
price of the British pound is $1.71-meaning it takes $1.71 to buy 1 pound
Why do agents
want to swap
marks for
dollars?
Exchange rates
are determined by
the supply and demand of
foreign exchange
DM per $
•To buy
American-made
goods.
•To hold stocks
in U.S.
companies or
other dollardenominated
assets.
S
1.82
1.69
In this case, the
mark
depreciates
against the dollar
•To speculate on
D’ future exchange
rate movements
D
0
$’s
Source: Wall Street Journal
Currency Cross Rates New York Trading,July 9, 1999
Dollar
Yen
D-Mark
Franc
6.44
.052
3.35
...
Germany 1.92
.016
...
.298
1.96
122.38
...
63.70
18.99
124.58
U.S.
...
.008
.52
.155
1.01
Euro
.98
.008
.511
.152
...
France
Japan
Euro
Firms and individuals demand
marks to buy German- made
goods, to hold mark-denominated
financial assets, or to profit from
what they hope will be an increase
in the international value of the mark.
$ per DM
Dollar
appreciates
against the mark
S
S’
.59
.55
D
DMs
Let the dollar price of the mark = $0.59--i.e., it costs
59 cents to purchase 1 mark in the market for
foreign exchange.
Let the mark price of a Krups espresso maker = 100
marks
Question:
What is the dollar price of the Krups
espresso maker?
$ price = (.59)(100) = $59.00
Effect of an appreciating dollar on the price of
imported goods
What if the dollar should appreciate, or gain value,
against the mark?
Let the dollar price of the mark decrease to $0.55 .
Question:
What is the dollar price of the Krups
espresso maker?
$ price = (.55)(100) = $55.00
Let the mark price of the dollar = 1.69 marks--i.e., its cost
1.69 marks to buy a dollar in the foreign exchange
market.
Let the dollar price of the Microsoft Windows 98 = $189.00
Question:
What is the mark price of Windows 98?
Mark price = (1.69)(189.00) = 319.41 marks
Effect of a depreciating mark on the price of
Windows 98
Let the mark price of the dollar increase to 1.82
marks.
Question:
What is the mark price of
Windows 98?
Mark price = (1.82)(189.00) = 343.98 marks
Like a federal deficit,
a trade deficit must be
financed. If international
borrowing is ruled out,then a
a deficit might “crowd out”
private borrowing and investment
The following holds for
an open economy
without external
(foreign) borrowing:
Sp = I + Government
Deficit + Trade Deficit
Allowing for external
(foreign) borrowing, the
following is true by
definition:
SP + foreign borrowing  I
+ government deficit +
trade deficit
External borrowing
can impact domestic
interest
rates, and leave
the nation vulnerable to
“capital flight.”It can
also comprise
political autonomy