THE BALANCE OF PAYMENTS AND INTERNATIONAL ECOMONIC LINKAGES

1. THE BALANCE OF PAYMENTS AND INTERNATIONAL ECOMONIC LINKAGES

2. Context A.What is the BOP? B.The BOP Equilibrium C.International Economic Linkages D.Coping With Current Account Deficit

3. What is the balance of payments(BOP)? • The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year.

4. The components of the BOP’s • Current account • Capital account • Financial account(Official reserves account)

5. 1.Current account • The current account is the total of the net sales from trade in goods and services (balance of trade), net factor income (such as dividends and interest payments from abroad), and net unilateral transfers from abroad (such as foreign aid, grants, gifts, etc.)

6. Current account balance world Red = deficit (more imports than exports) Blue = surplus (more exports than imports) Grey = no data

7. 2.Capital account • The capital account is where all international capital transfers are recorded. It refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

8. 3.Financial account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. The financial account are divided into categories such as foreign direct investment (FDI), portfolio investment, and other investment.

9. If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, the domestic country has a financial account surplus. • On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, the domestic country has afinancial account deficit.

10. The BOP Equilibrium Current account +(Capital and financial account)=0 This is a condition where there are no changes in Official Reserves.When there is no change in Official Reserves, the balance of payments may also be stated as follows: Current account deficit(or surplus)= -Capital and financial account surplus (or deficit)

11. INTERNATIONAL ECONOMIC LINKAGES International Economıc Linkages is setofbasicmacroeconomic identities links that domestic spending and productionto current and capital accounts.

12. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL A.Domestic Savings and Investment and Capital Account • National Income Accounting (NI) National Income is either spent(C) or saved(S) NI=C+S

13. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • National Spending (NS) is divided into personal spending (C) and invesment (I) NS=C+I • Substracting NI-NS=S-I If NI>NS ;S>I which implies that surplus capital spent overseas.

14. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL d. In a freely-floating system, excess saving = the capital account balance e. Implications: 1. A nation which produces more than it spends has a net capitaloutflow producing a capitalaccount deficit.

15. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL 2. A nation which spends morethan it produces has a net capital inflow producing a capital account surplus. 3.A healthy economy will tend torun a current account deficit.

16. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL B.THE LINK BETWEEN THE CURRENT AND CAPITAL ACCOUNTS 1.Beginning identity NI - NS = X - M where X = exports M = imports X-M=current account balance (CA)

17. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • Combining When we combine with NI – NS = S - I NI – NS = X - M it means that; S - I = X - M • Net Foreign Investment (NFI) S – I=Net Foreign Invesment it means that; NFI = X - M

18. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL • Implications: a.If Current Account Balance (CA )is in surplus, the nation must be a net exporter of capital. b.If Current Account Balance (CA) is a deficit, the nation is amajor capital importer. c.When NS > NI, the excess mustbe acquired through foreign trade.

19. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL C.GOVERNMENT BUDGETS ANDCURRENT ACCOUNT DEFICITS • CURRENT ACCOUNT BALANCE CA = Saving Surplus - Goverment budgetdeficit 2. CA Deficit meansthe nation is not saving enough to finance and the deficit. 3. CA Surplus meansthe nation is saving more than needed to finance its and deficit.

20. COPING WITH THE CURRENT ACCOUNT DEFICIT THE POSSIBLE SOLUTIONS TO WORK: 1.Currency Depreciation 2.Protectionism Currency Depreciationis the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system.

21. Currency Depreciation is ineffective because: 1.It takes time to affect trade. 2.J-Curve Effectstates that a decline in currencyvalue will initially worsen the deficit before improvement.

22. Protectionism is policy of protecting domestic industries against foreign competition by means of tariffs,subsidies, import quotas, or other restrictions or handicaps placed on the imports of foreign competitors.