Balance of Payments. Current Account data is for 1998. Balance of Payments Accounting current acct + nonofficial capital acct + official capital acct + ) SDR + SD / 0. Two important Rules
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Deficit with Japan: Japanese import more per capita from U.S. than U.S. does from Japan.
According to Kenneth Kasa (San Francisco Fed) As U.S. baby boomers come to age saving will increase and as Japanese retire their spending will increase => U.S. current account deficit will shrink. (Modigliani Life-Cyle model).
Twin deficit problem? William Branson of Princeton: The U.S. government deficit causes an inflow of capital from abroad, which in turn leads to a negative current account balance.
Current Acct deficits => capital account surpluses => foreigners have a claim on future real resources in the United States. True, but it is only a problem to the extent that investments are portfolio investments used to finance unproductive government deficits.
Should focus on Trade Deficit/U.S. GDP instead of size of deficit.
Deficits are positively correlated to real GDP growth and negatively correlated to unemployment rates (4.1% as of 10/99 lowest u rate in 29 years). From 1992 to 1997, U.S. trade deficit almost tripled but industrial production increased 24% and manufacturing output was up 27%. In Japan, the IPI was up only 8% and in Germany, the IPI was up only 1%.
The U.S. Department of Commerce in 1991 completed a 2 ½ year study. Their results revealed that during the 1980s, U.S. manufacturing growth tripled and was then on par with Japan. In 1994, our manufacturing growth was twice that of both Japan and Germany. The manufacturing share of GDP increased to the level of output achieved in the 1960s. A study by Andre Warner of Harvard and another study by the Federal Reserve confirmed these results
From 1959 to 1995, durable goods accounted for between 12 to 18% of GDP. As of the 2nd quarter of 1999, the durable goods/GDP ratio was 17.4%.
Total workers employed in manufacturing today are about the same as the 1960s.
From 1987 to 1993, U.S. manufacturing X to the world increased 95% and increased 138% to Latin America and the Caribbean.
From 1993 to 1998, manufacturing jobs increased by 600,000.
U.S. leads in audio & video equipment, air conditioners, building and construction hardware, computers and computer software, environmental technology, medical equipment, chemicals, navigational & survey equipment, telecommunications equipment, semiconductors, and has 90% of the market for advanced processors.
Jeffrey Sachs and Andre Warner: reviewed dozens of countries between the years 1970 to 1990 and found those open to trade had average growth rates of 4.7% and those that were closed 1%.
Bank of Japan’s plan to increase their money supply is being scrutinized by the market (10-18)
Bank of Japan is now expected not to change monetary policy on Wednesday helped to stabilize exchange expectations about the yen => dollar dropped (10-26,27)
Central Bank Intervention and CB announcements
Analysts anticipate that the Bank of Japan may intervene to stop depreciation of dollar below 102-104 range (10-18) Yen/$ = 102.3 as of 12/13/99.
Euro CB chief Otmar Issing supported the Euro when he said he saw upside risks changing interest rates from the downside to the upside => likely to raise interest rates on Nov 4. Euro’s muted action gave weight to speculation that there is no broad-based demand for the euro ahead of the year end (10-26)
Euro CB president, Wim Duisenberg was not mincing words in touting the case for tighter monetary policy in the euro zone, but euro was sold heavily despite expectations that today’s M3 figures would indicate inflation => interest rates are likely to be increased and E(euro) to rise in value. (10-27)
Brazil’s CB intervened selling $ first time since Aug 18 => real increased (10-28)
Investors are moving assets out of U.S. markets => depreciates $ (10-18)
Expected changes in real output
U.S. expansion coming to an end at the same time Europe and Japan are growing caused the dollar to drop (10-18)
Current Account influence
Investors in Japan are bringing money back to Japan because they are panicking or suffering from increased risk aversion. WSJ says this is typical of investors from countries with current account surpluses like yen, euro, Swiss franc (10-18)
UK trade deficit narrowed => dollar down (10-26)
Sept trade stats for Japan showed current account surplus shrinking 10% => consumers are buying more => Japanese economy is doing better => dollar down (10-26)
If we devalue or depreciate the domestic currency, the domestic price of imports rises immediately, the price of exports will rise with a lag as our products attract a higher demand because they are cheaper in terms of the foreign currency. The physical quantity of exports will not increase immediately because it will take time add to plant capacity to satisfy increased demand. We cannot cut back on all imported goods immediately–we need time to find domestic substitutes or inferior but cheaper foreign substitutes. In the short run the elasticity of quantity movements is small (inelastic). Thus the price of the import good rising dominates causing the BOT to become a larger deficit or a smaller surplus. Eventually quantities adjust and the BOT will become less of a deficit or a bigger surplus.