1. International Economics Mordecai E. Kreinin Copyright ©2002 South-Western/Thomson Learning. All rights reserved. Copyright ©2002 South-Western/Thomson Learning. All rights reserved. Part II International Financial Relations Part II International Financial Relations

2. C10-2 CHAPTER 10 Statement of International Transactions

3. C10-3 OVERVIEW Main Items in the Statement of International Transactions Uses and Misuses of International Transactions Statistics Main Items in the Statement of International Transactions Uses and Misuses of International Transactions Statistics

4. C10-4 The Nature of Financial Relations National currencies Exchange rates Balancing accounts Free market economy International monetary or financial system National currencies Exchange rates Balancing accounts Free market economy International monetary or financial system

5. C10-5 Important Concepts International transactions statement Dollar inpayments Capital account Balance of trade Balance on goods and services Balance on current account Purchases or sales of assets Direct investment International transactions statement Dollar inpayments Capital account Balance of trade Balance on goods and services Balance on current account Purchases or sales of assets Direct investment Dollar outpayments Current account Autonomous items Official reserve transactions (or overall) balance Accommodating items Changes in official reserves X – M = S – I M – X = I - S

6. C10-6 Main Items in the Statement of International Transactions The current account Trade balance The balance on goods and services (P F /P D ) The balance on current account Determinants of trade Imports vary positively with country’s output or income, negatively with ratio of foreign to domestic prices The current account Trade balance The balance on goods and services (P F /P D ) The balance on current account Determinants of trade Imports vary positively with country’s output or income, negatively with ratio of foreign to domestic prices

7. C10-7 Main Items in the Statement of International Transactions Capital account Autonomous and accommodating items Official reserve transactions balance (overall balance) Changes in official reserves IMF and Special Drawing Rights (SDRs) Fixed vs. fluctuating exchange rates Federal Reserve Bank Overall imbalance: change in official reserves Capital account Autonomous and accommodating items Official reserve transactions balance (overall balance) Changes in official reserves IMF and Special Drawing Rights (SDRs) Fixed vs. fluctuating exchange rates Federal Reserve Bank Overall imbalance: change in official reserves

8. C10-8 Main Items in the Statement of International Transactions Balance of payments in the National Economy Output: GDP = C + I + (X – M) Income: Y = C + S Because GDP = Y : C + I +(X – M) = C + S; OR I + X – M = S X – M = S – I (Japan) M – X = Ix – S (U.S.) To the extent that savings fall short of investment, the difference is financed by the inflow of foreign capital Balance of payments in the National Economy Output: GDP = C + I + (X – M) Income: Y = C + S Because GDP = Y : C + I +(X – M) = C + S; OR I + X – M = S X – M = S – I (Japan) M – X = Ix – S (U.S.) To the extent that savings fall short of investment, the difference is financed by the inflow of foreign capital

9. C10-9 Uses and Misuses of International Transactions Statistics Survey of Current Business, Economic Report of the President, International Financial Statistics, Balance of Payments Yearbook Imbalance must persist for a year or longer before determined a fundamental, rather than temporary, phenomenon Long-run shifts in the balance on merchandise trade Survey of Current Business, Economic Report of the President, International Financial Statistics, Balance of Payments Yearbook Imbalance must persist for a year or longer before determined a fundamental, rather than temporary, phenomenon Long-run shifts in the balance on merchandise trade

10. C10-10 Uses and Misuses of International Transactions Statistics Placing balance-of-payments considerations in proper perspective Limitations of balance-of-payments information Flows and Stocks Nation vs. state Statistics, currency, regulations Manifestation in a state Placing balance-of-payments considerations in proper perspective Limitations of balance-of-payments information Flows and Stocks Nation vs. state Statistics, currency, regulations Manifestation in a state

11. C10-11 Summary Current account, capital account, dollar inpayments, outpayments Balance of trade, balance on goods and services, balance on current account Official reserve transactions balance (overall balance) Deficit, surplus on current account U.S. imports vary positively w/output or income, negatively w/domestic price ratio; exports vary positively w/world output or income, positively w/ foreign to domestic price ratio Statement of international transactions reports flows over one- year periods No statistical data for states, manifest depressed or flourishing regions, productive factor movement, government aid Current account, capital account, dollar inpayments, outpayments Balance of trade, balance on goods and services, balance on current account Official reserve transactions balance (overall balance) Deficit, surplus on current account U.S. imports vary positively w/output or income, negatively w/domestic price ratio; exports vary positively w/world output or income, positively w/ foreign to domestic price ratio Statement of international transactions reports flows over one- year periods No statistical data for states, manifest depressed or flourishing regions, productive factor movement, government aid