International Finance FINA 5331 Lecture 6: Balance of Payments Read: Chapters 3 Aaron Smallwood Ph.D.

More recent data (billions $) Current Account Fin Account FDI In FDI Out Port. Assets Port. Liab. Reserve 2011:Q :Q :Q :Q :Q :Q :Q :Q :Q :Q

More recently Smaller current account surpluses for China. (in billions) –2011: $136.0, 2012: $193.1, 2013: $182.8 (est) Surprisingly in Feb of this year, China ran a deficit of $23 billion. The surplus for the first quarter of 2014 was only $7.2 billion ($28.8 billion at annual rate). More private investment in China than Chinese investment abroad Official reserve holdings declined to $387.8 billion in 2011, and even further to $96.5 billion in 2012 ($203.6 billion through Q2 2013). Real GDP has slowed slightly. According to the World Bank, from 10.4% in 2010 to 7.7 % in 2013.

If you are interested Specific information related to US balance of payments can be found at the Bureau of Economic Analysis’ website: 014/pdf/trans413.pdfhttp:// 014/pdf/trans413.pdf For example, official reserves declined by $2.782 billion in Q4: 2013, resulting in a positive entry of $2.782 in US official reserves.

Balance of Payments and National Income Accounting GNP = Y = C + I + G + X – M Y = C + S + T X – M = (S- I) + (T- G) If a developing economy experiences large trade deficits (X-M <0), the remedies are: 1.Savings must increase, S↑ 2.Investment must fall, I↓ 3.Government spending must fall, G↓ 4.Taxes must rise, T↑

In class project Let’s classify several hypothetical transactions for the US. –A Japanese insurance company purchases $1,000,000 worth of bonds from a US company. The Japanese company owns 2% of the outstanding shares of the US company. They pay for the bonds out of a bank account kept in New York City. –A US computer programmer is hired by a Chinese company for consulting and gets paid $60,000 from a US bank account maintained by the Chinese company. –An American living in Los Angeles sends a check for $20,000 drawn on his LA bank account as a gift to his parents in Bombay. –The Federal Reserve sells yen and acquires $500,000 on the open market from a US car dealer. The car dealer uses their proceeds of yen to acquire $500,000 worth of Hondas. –A Dutch trader receives a dividend check from IBM for $25,000. The check is drawn on a bank in New York.

Official reserves The official settlements balance, sometimes referred to as the overall balance, is the total balance on the current account plus the balance on all NON-OFFICIAL reserve transactions. It must be exactly offset by the balance on official reserves transactions

Official reserves When a country buys foreign reserves (for example, if the People’s Bank of China acquires dollars): –China’s assets increase: Debit entries in official reserves (a deficit) –Offset by an official settlements surplus If a country must sell official reserves (Thailand in 1997 because of speculative attacks): –The country’s reserve assets decrease: Credit entries in official reserves (a surplus) –Offset by an official settlements deficit.