TERMS OF TRADE The value of a country's exports relative to that of its imports.
LESSON OBJECTIVES 1)Understand the balance of payments account. 2)Look at the difference between each part of the BOP account. 3) Identify which parts of the account will be classified as trade.
NEW WORDS Balance of trade - Торговый баланс Balance of payments - платежный баланс Current account - текущий счет Capital account - счет операций с капиталом Trade deficit - дефицит Trade surplus – сальдо Export - экспорт Import- Импорт
Definition TERMS OF TRADE measures a country’s export prices in relation to its import prices, and is expressed as: Export prices X 100 Import Prices
EXAMPLE If, over a given period, the index of export prices rises by 10% and the index of import prices rises by 5%, the terms of trade are: 110 x 100 / 105 = 104.8 What does this mean????
This means that the terms of trade have improved by 4.8%. When the terms of trade rise: ABOVE 100 BELOW 100 improving worsening
Basically: Export Price Over Import price x 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation).
If the percentage is under 1 % then your economy is not going well (More money going out than coming in).
QUESTION So… when is a country’s BALANCE OF TRADE positive or negative???
BALANCE OF TRADE BALANCE OF TRADE: the difference between the value of the exports from, and imports into a country (net exports) included in the balance of payments).
BALANCE OF PAYMENTS The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. balance of payments determines how much money is going in and out of a country.
BALANCE OF PAYMENTS If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance
BOP can tell the observer if a country has a deficit or a surplusdeficitsurplus DEFICITSURPLUS When will a country experience a deficit or a surplus?
BALANCE OF PAYMENTS The Balance of Payments Divided The BOP is divided into three main categories: the current account, the capital account and the financial account. current account
CURRENT ACCOUNT Shows balance of trade ( difference between export ans import of goods and services CAPITAL ACCOUNT Shows inflows and outflows of capital assets FINANCIAL ACCOUNTS Investments in external financial assets and liabilities
Calculating the Current Account When CA is the current account, X and M the export and import of goods and services respectively, NY the net income from abroad, and NCT the net current transfers.
CURRENT ACCOUNT BALANCE OF TRADE IN GOODS AND SERVICES = imports +Exports of goods and services INCOME = all inflows - outflows of income from rent interest and profit from abroad CURRENT TRANSFERS = inflows - outflows due to transfers (gifts, pensions, foreign aid
CAPITAL ACCOUNT CAPITAL TRANSFERS = debt cancellation + investment grants NON PRODUCED< NON FINANCIAL ASSETS = purchase/use of natural resources that have not been produced eg land, water, airspace
FINANCIAL ACCOUNT DIRECT INVESTMENT = physical capital eg buildings and factories, equipment PORTFOLIO INVESTMENT = stocks and bonds RESERVE ASSETS = foreign currency reserves Central bank can buy/ sell to influence value of a country’s currency
What Does It Tell Us? Theoretically, the balance should be zero In the real world this is improbable Current account has a surplus or a deficit
SURPLUS A surplus = an economy that is a net creditor to the rest of the world. …means The country is providing an abundance of resources to other economies, and is owed money in return EXPORTS > IMPORTS
DEFICIT A deficit reflects government and an economy that is a net debtor to the rest of the world. It is using resources from other economies to meet its domestic consumption and investment requirements. IMPORTS > EXPORTS
If a country's terms of trade improve, it means that for every unit of exports sold it can buy more units of imported goods True? False?
A worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports True? False?
Many development countries have persistent current account deficits (deficits lasting for many years) True? False?
Persistent account deficits is bad (harmful) for a country. True? False?
trade protection hurts the economy of the country True? False?
Causes of a current account deficit Excessive growthgrowth De-industrialisation High export prices Non-price competitiveness Low levels of investment in human capital Poor productivity Low levels of investment in real & human capital The rise of alternative global suppliers
QUESTIONS 1)Why do developed countries run current account deficits? 2) Is a current account deficit good or bad for the economy?
Economic Policies to Improve the Balance of Payments
Surplus countries (balance of payments on current account for 2011) % of GDP China3.1 Germany5.3 Malaysia11.1 Switzerland13.9 Singapore17.7 Norway18.2 Saudi Arabia31.8 Kuwait39.7 Countries with current account surpluses Find Countries with current account surpluses AT PRESENT/ now
WHAT ABOUT TRADE DEFICITS? Top Ten Countries with which the U.S. has a Trade Deficit For the month of April 2013 Year To Date Deficit in Deficit in Millions Millions Country Name of U.S. $ of U.S. $ China -24,109.91 -93,195.98 China Japan -6,942.02 -25,519.82 Japan Germany -6,094.19 -19,936.31 Germany Mexico -4,432.91 -17,551.10Mexico Saudi Arabia -2,562.61 -8,340.83 Saudi Arabia Canada -2,432.24 -12,193.03Canada India -2,419.99 -6,916.67 India Ireland -2,398.66 -8,622.51 Ireland Korea, South -2,380.30 -6,981.92Korea, South Italy -2,028.53 -6,861.59 For more information contact Italy
REDUCING CURRENT ACCOUNT DEFICITS The quarterly current account of Australia ($A million) since 1959 What do you notice???
REDUCING CURRENT ACCOUNT DEFICIT increasing exports (goods going out of a country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). HOW? PROBLEM???
REDUCING CURRENT ACCOUNT DEFICIT DIRECTLY: through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies, custom duty exemptions etc
REDUCING CURRENT ACCOUNT DEFICIT EG. Currency wars -countries devalue their currencies to ensure export competitiveness …is a protectionist policy GOAL? Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments
REDUCING CURRENT ACCOUNT DEFICIT OTHERS adjusting government spending to favor domestic suppliers is also effective. measures that increase domestic savings (or reduced domestic borrowing),
REDUCING CURRENT ACCOUNT DEFICIT Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments
Interrelationships in the balance of paymentsMain article: Balance of paymentsAbsent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts. One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire U.S. assets (See Ben Bernanke, William Poole links below). However, the main viewpoint undoubtedly remains that the causative factor is the current account and that the positive financial account reflects the need to finance the country's current account deficit