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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall1 Chapter 4: The Balance of Payments Power Points created by: Joseph F. Greco Ph. D.

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Presentation on theme: "Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall1 Chapter 4: The Balance of Payments Power Points created by: Joseph F. Greco Ph. D."— Presentation transcript:

1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall1 Chapter 4: The Balance of Payments Power Points created by: Joseph F. Greco Ph. D. California State University, Fullerton Mihaylo College of Business and Economics

2 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall2 Chapter 4: The Balance of Payments 4.1The Balance of Payments: Concepts and Terminology 4.2Surpluses and Deficits in the Balance of Payment Accounts 4.3The Dynamics of the BOP 4.4Savings, Investment, Income, and the BOP

3 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall3 4.1The Balance of Payments: Concepts and Terminology The Balance of Payments : Overview Introduction Major Accounts of the Balance of Payments Double-Entry Accounting System Current Account Transactions Capital Account Transactions Official Reserves Account Transactions

4 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall4 4.1The Balance of Payments: Concepts and Terminology Introduction Balance of payments (BOP) Accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries

5 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall5 4.1The Balance of Payments: Concepts and Terminology Major Accounts of the Balance of Payments Current account Imports, exports, transfers Capital account Official settlements/reserves account

6 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall6 4.1The Balance of Payments: Concepts and Terminology Double-Entry Accounting System Credit/debit transactions

7 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall7 4.1The Balance of Payments: Concepts and Terminology Current Account Transactions Interest and dividend receipts and payments Transfer payments between countries

8 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall8 4.1The Balance of Payments: Concepts and Terminology Capital Account Transactions Capital outflow Capital flight Capital inflow

9 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall9 4.1The Balance of Payments: Concepts and Terminology Official Reserves Account Transactions Official international reserves Implications for fixed exchange rates

10 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall10 Exhibit 4.1 Summary of the Accounts of the Balance of Payments

11 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall11 4.2Surpluses and Deficits in the Balance of Payment Accounts Surpluses and Deficits: Overview Introduction An Important Balance of Payments Identity The U.S. Current Account The U.S. Capital and Financial Accounts BOP Deficits and Surpluses and the Official Settlements Account

12 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall12 4.2Surpluses and Deficits in the Balance of Payment Accounts Introduction Surplus/deficit Surplus results when the credit exceed the debit transactions Deficit results when the debits exceed the credit transactions

13 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall13 4.2Surpluses and Deficits in the Balance of Payment Accounts An Important Balance of Payments Identity: current account + capital account = 0

14 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall14 4.2Surpluses and Deficits in the Balance of Payment Accounts The U.S. Current Account Goods Services Balance on good and services Investment income Unilateral current transfers, Net Balance on current account

15 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall15 Exhibit 4.2 The U.S. Current Account, 1970-2005 (Millions of Dollars; Credits, +; Debits, -)

16 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall16 4.2Surpluses and Deficits in the Balance of Payment Accounts The U.S. Capital and Financial Accounts U.S.-Owned assets abroad, net Foreign assets in the U.S., net Capital account transfers Balance on the capital account The statistical discrepancy The official settlements, or reserves, account

17 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall17 Exhibit 4.3 The U.S. Capital and Financial Account, 1970-2005 (Millions of Dollars; Credits, +; Debits, -)

18 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall18 Exhibit 4.4 U.S. Balance of Payments Accounts for 2005 (Billions of Dollars)

19 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall19 Exhibit 4.5 World Current Account Balance (Billions of U.S. Dollars)

20 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall20 4.2Surpluses and Deficits in the Balance of Payment Accounts BOP Deficits and Surpluses and the Official Settlements Account The central bank gains or loses international reserves

21 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall21 Exhibit 4.6 Current Account Balances for the G7 Countries as a Percentage of GDP

22 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall22 Exhibit 4.6 Current Account Balances for the G7 Countries as a Percentage of GDP (continued)

23 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall23 Exhibit 4.7 Current Account Balances for Developing Asian Economies as a Percentage of GDP

24 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall24 4.3The Dynamics of the BOP The Trade Account and the Investment Income Account Countries as Net Creditors or Net Debtors Net foreign assets Data on International Investment Positions

25 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall25 Exhibit 4.8 International Investment Positions

26 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall26 4.4Savings, Investment, Income, and the BOP Savings, Investment, Income and the BOP: Overview Introduction Linking the Current Account to National Income National Savings, Investment, and the Current Account Current Accounts and Government Deficits What Causes Current Account Deficits and Surpluses? Ricardian Equivalence Individuals’ Intertemporal Budget Constraints Investment Spending

27 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall27 4.4Savings, Investment, Income, and the BOP Introduction National income and product accounts (NIPA) The current account surpluses and deficits are linked to the saving and spending patterns of a country

28 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall28 4.4Savings, Investment, Income, and the BOP Linking the Current Account to National Income: GNI = GSP + NFI GNI – (C+ I + G) = GDP + NFI – (C + I +G)= NX + NFI Important National Income Accounting Identity: GNI – ( C + I +G) = CA

29 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall29 4.4Savings, Investment, Income, and the BOP National Savings, Investment, and the Current Account National Savings = GNI – Consumption of public and private sectors

30 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall30 4.4Savings, Investment, Income, and the BOP Current Accounts and Government Deficits Net private saving National government saving Surplus on the government budget

31 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall31 4.4Savings, Investment, Income, and the BOP What Causes Current Account Deficits and Surpluses? Ricardian Equivalence Individuals’ Intertemporal Budget Constraints Investment Spending

32 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall32 4.4Savings, Investment, Income, and the BOP Ricardian Equivalence The idea that the timing of taxes is irrelevant Individuals will increase saving in response to a reduction in current taxation They know they will be taxed more in the future to pay the interest and principal on the government’s debt

33 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall33 4.4Savings, Investment, Income, and the BOP Individuals’ Intertemporal Budget Constraints decisions to work, how much to consume and how to invest any accumulated wealth depend on The prices and opportunities likely in the future

34 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall34 4.4Savings, Investment, Income, and the BOP Investment Spending Business continually evaluate investment projects subject to intertemporal budget constraint

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