Ch19 basic economics

8/11/2019 Ch19 basic economics

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Chapter 19

The Balance of

International Payments

2001 South-Western College Publishing


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Balance of Trade

Relative level of exports and imports acountry experiences over a period of 1year

Emerging nationsare generally heavyimporters of machinery, equipment, andfinished goods

Emerging nationsare generally heavyexporters of natural resources

Fully-developed industrial nationstend tobe large exporters of capital


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Balance of Payments

Statistical account of financial

transactions between nations over a

period of 1 yearCredit - international transaction that

provides a claim for payment from

another country tothe U.S.Debit - international transaction that

provides a claim for payment fromthe

U.S. to another country


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Balance of Payments

Four major categories:

Current account

Capital account

Statistical discrepancy

Settlement account


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Current Account

Merchandise trade: most transactions

involve purchase and sale of goods and

servicesSales give rise to credit entries

Purchases give rise to debit entries

Service transactions: some transactionsinvolve services performed by one

country for another


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Current Account (cont.)

Investment transactions: financial

transactions, interest, dividends,

corporate profitsMilitary transactions: sale of military

hardware, military expenditures outside

the U.S.Unilateral transfers: foreign aid, money

going out of U.S. to U.S. citizens abroad


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U.S. International Transaction

Balances, 1970-1999

25

0

-25

-50

-75

-100

-125

-150

-175

-200

-225

-250

-275

Billions

$

Year

Balance on

Current Ac count

Merchandise

Trade Balance

Balance on Goods

and Services

1970 1975 1980 1985 1990 1995 1996 1997 19981999


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Capital Account

Flow of capital investments between

nations, notincluding income from these

investments


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Statistical Discrepancy

Adjustment item in both current and

capital accounts due to inaccurate or

incomplete dataSize of the statistical discrepancy may be

affected by transactions such as

smugglingunrecorded bank deposits

incomplete estimates of tour ist spending


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Settlement Account

Account through which transactions are

made to settle remaining outstanding

claims in the current and capital accountsin order to achieve the balance of

payments.


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Foreign Exchange Rate

The price of one currency in terms of

another currency


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Exchange Rates of Selected Countries

Year

1970

1980

1990

1993

1994

1995

1999

U.S.Dollar

1.00 =

1.00 =

1.00 =

1.00 =

1.00 =

1.00 =

1.00 =

BritishPound

0.42 =

0.42 =

0.52 =

0.68 =

0.64 =

0.65 =

0.61 =

GermanMark

3.65 =

1.96 =

1.49 =

1.73 =

1.55 =

1.43 =

1.94 =

JapaneseYen

358 =

203 =

134 =

112 =

100 =

103 =

102 =

ItalianLira

623 =

931 =

1,130=

1,704=

1,630=

1,585=

1,923=

FrenchFranc

5.52 =

4.52 =

5.13 =

5.90 =

5.35 =

4.90 =

6.51 =

CanadianDollar

1.01

1.19

1.16

1.32

1.40

1.37

1.45 =

Euro

1.00


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Exchange Rates

Fixed Exchange Rates: controlled by thegovernment and maintained at a prescribed level

Gold Standard- nations def ined value of

currency in terms of gold

Bretton Woods Agreement- nations def inedvalue of cur rency in terms of gold , with the

U.S. dollar as the reserve cur rency

Floating Exchange Rates: allowed to changewith the changes in the supply and demand for

currencies


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Bretton Woods Agreement

Created the International Monetary

Fund ( IMF)

pool of cur rencies from which countr ies couldborrow to meet balance-of -payment deficits

Special Drawing Rights (paper gold): the

IOUs of the IMF

Devaluation: occurs when a country lowers thevalue of its cur rency

Revaluation: occurs when a country raises the

value of its cur rency


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Quantity of CanadianDollars

Restoring Equilibrium and Fixed

Exchange Rates

Quantity of CanadianDollars

U.S. DollarPrice of

CanadianDollars

U.S. DollarPrice of

CanadianDollars

94

92.5

92.5

0 Q1 Q2 0 Q1 Q2

A A

X

BB

S1

D1

S1

S2

D2

D2D1

(a) (b)


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Floating Exchange Rates

Major advantage: countr ies are free to

pursue their own domestic economic

policies without being tied to internationalexchange rate commitments

Major disadvantage:Wide swings in the

rates can disrupt international trade andinvestment as currencies depreciate and

appreciate


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Floating Exchange Rates

Depreciation - decline in a currencys

value brought about by a change in the

supply and demand for that currencyAppreciation- rise in a currencys value

brought about because of market forces


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Restoring Equilibrium

with Flexible Exchange Rates

Quantity ofCanadian

Dollars

U.S. DollarPrice of

CanadianDollars

$1.05

$1.00

0 Q1Q2

XY

S

D1

D2

Z


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U.S. Balance of Payments

Dollar shortage

Gold outflow

Devaluation of the dollar

International financial developments of

the 1990s

Southeast Asian crisis

Russia and Latin America

European Monetary Unit

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Ch19 basic economics