Principles of Macroeconomics · 2017. 2. 2. · Balance of Payments • Current Account: The value of trade of goods and services across boarders •Capital Account: The monetary

PrinciplesofMacroeconomicsModule7.1

UnderstandingBalanceofPayments

276

BalanceofPaymentsBalanceofPaymentsarethemeasurementofeconomicactivityacountryconductsinternationally

• CurrentAccount:• CapitalAccount:

277

BalanceofPayments• CurrentAccount:Thevalueoftradeofgoodsandservicesacrossboarders

• CapitalAccount:Themonetaryflowsbetweencountriesusedtopurchasefinancialassetssuchasstocks,bonds,realestateandotherrelateditems

CapitalAccount+CurrentAccount=0

IfCurrentAccountisindeficit,thenCapitalAccountisinsurplus

IfCurrentAccountisinsurplus,thenCapitalAccountisindeficit

278

BalanceofPayments• CurrentAccount:Thevalueoftradeofgoodsandservicesacrossboarders

• CapitalAccount:Themonetaryflowsbetweencountriesusedtopurchasefinancialassetssuchasstocks,bonds,realestateandotherrelateditems




279

BalanceofPayments




280

CurrentAccount

• Netexportsofgoodsandservices, (thedifferenceinvalueofexportsminusimports,whichcanbewrittenas) NX,(1)

• Netinvestmentincome

• Nettransfers

à Largestcomponent:NetExports

281

FactorsthatDetermineCurrentAccount

1. ChangeinEconomicGrowthRates/NationalIncome• Higherdomesticgrowthàmoredemandoverallàmoredemandforimportstoo!• Higherforeigngrowthà moredemandforexports• Relativeeconomicgrowthratesdetermineifimportsorexportsrise

2. Changeinrelativepricesorinflation3. Changeintastesandpreferences4. Changeincomparativeadvantage

282


1. ChangeinEconomicGrowthRates/NationalIncome

2. Changeinrelativepricesorinflation• Relativepricesdeterminecomparativepriceofimportsandexports• Higherdomesticinflation

• Exportsarerelativelymoreexpensiveforforeignersnow:Exportswillfall• Importsarerelativelycheaperfordomesticconsumers:Importswillrise

3. Changeintastesandpreferences4. Changeincomparativeadvantage

283


1. ChangeinEconomicGrowthRates/NationalIncome2. Changeinrelativepricesorinflation

3. Changeintastesandpreferences• Ifbuyers’preferenceschangeforagood– ifitisatradedgood,thennetexportswillbeimpacted

• PerceptionthatChineseproductsareofpoorqualityà buyer’sdemandforthemmaydecline

4. Changeincomparativeadvantage

284


1. ChangeinEconomicGrowthRates/NationalIncome2. Changeinrelativepricesorinflation3. Changeintastesandpreferences

4. Changeincomparativeadvantage• Increasesinproductivityviatechnologicaladvancements,lowerproductioncosts,andimprovedhumancapitalchangecomparativeadvantageandmayimpactnetexports

285

CapitalAccount

Becausethecapitalaccountdealswithfinancialflows,themostimportantfactoraffectingitwillbeinterestrates

• Determinethereturnonfinancialassetsinacountry• Investorschasing“highestreturn”willmovefinancialassetstocountrieswithhighestinterestrates

286

KeyTakeaways

• Thebalanceofpaymentsmeasurestheeconomicinteractionacountryhaswithglobalmarkets

• ItiscomprisedoftheCurrentAccountandCapitalAccount

• CurrentAccount– tradeingoodsandservices• CapitalAccount– financialflows

287


CapitalFlows,TradeandGlobalMarkets

288

Inthisvideo…

• InthisvideowewilldiscussNetExports,NetCapitalFlows,andhowthetwoarelinked

289

Imports,ExportsandTrade

•NetExports=Exports– Imports

• NetExports<0:Tradedeficità Exports<Imports

• NetExports>0:Tradesurplusà Exports>Imports

290

FactorsthatdetermineExportandImportVolumes

• Tastesandpreferencesathomeandabroad• Pricesofgoodsathomevs.abroad• Exchangerates• Incomeofhouseholds• Transportationcosts• Gov’tpoliciestowardstrade

291

• FactorsthatdetermineExportandImportvolumes:


292



293



294



295



296

FlowsofFinancialResources:NetCapitalFlows• Capitalflowsàmovementoffinancialassetsbetweenhomeandabroad

• Stocks,bonds,realestate,ect.

NetCapitalFlows=PurchaseofForeignAssets– PurchaseofDomesticAssetsbyDomesticResidentsbyForeignResidents

297

FlowsofFinancialResources:NetCapitalFlows

• NetCapitalInflow:Homecountryisreceivingmoreforeignfinancialinvestmentthanitissendingouttoothercountries

• NetCapitalOutflow:Homecountryissendingoutmorefinancialinvestmentthanitisreceiving

298

FlowsofFinancialResources:NetCapitalFlows

• NetCapitalInflow:Homecountryisreceivingmoreforeignfinancialinvestmentthanitissendingouttoothercountries

• NetCapitalOutflow:Homecountryissendingoutmorefinancialinvestmentthanitisreceiving

299

TypesofForeignInvestments

• ForeignDirectInvestmentà Foreignentity’sinvestmentincapital/machines/factoriesindomesticmarket(businessoperationsbyforeignentity)

• ForeignPortfolioInvestmentà Foreignentity’sinvestmentinfinancialassetsindomesticmarket(businessoperationsbydomesticentity)

300

FactorsthatinfluenceNetCapitalFlows

• Therealinterestratesbeingpaidonforeignassets.

• Therealinterestratesbeingpaidondomesticassets.

• Theperceivedeconomicandpoliticalrisksofholdingassetsabroad.

• Thegovernmentpoliciesthataffectforeignownershipofdomesticassets. 301





• Thegovernmentpoliciesthataffectforeignownershipofdomesticassets.

302






303






304

EquatingNetExportsandNetCapitalFlows

•RecallinBalanceofPayments• CurrentAccountà NetExports(NX)

• CapitalAccountà NetCapitalFlows(NC)

• NetExportsandNetCapitalFlowsmustoffseteachotherforBOP=0

305


• Whenanationisrunningatradesurplus(NX>0),itwillbeusingtheforeigncurrencytopurchaseforeignassets.Thus,capitalisflowingoutofthecountry(NC>0).

• Whenanationisrunningatradedeficit(NX<0),itmustbefinancingthenetpurchaseofthesegoodsbysellingassetsabroad.Thus,capitalisflowingintothecountry(NC<0).

306


• Whenanationisrunningatradesurplus(NX>0),itmustbeusingtheforeigncurrencytopurchaseforeignassets.Thus,capitalisflowingoutofthecountry(NC>0).

• Whenanationisrunningatradedeficit(NX<0),itmustbefinancingthenetpurchaseofthesegoodsbysellingassetsabroad.Thus,capitalisflowingintothecountry(NC<0).

307


Everyinternationaltransactioninvolvesexchange:• Whenasellercountrytransfersagoodorservicetoabuyercountry(export)thebuyercountrygivesupsomeassettopayforthegoodorservice.

• Netvalueofthegoodsandservicessoldbyacountry(netexports)mustequalthenetvalueoftheassetsacquired(netcapitalflow).

• RealexchangerateswilladjusttoequateNXandNC

308





309





310

TariffsandQuotas• Sometimes,governmentsareconcernedwithcompetitionfromabroad,especiallywhenitaffectsdomesticproduction

• Theywillsetuptradebarrierstomakeitmoredifficult/costlytoimportgoods• Tariffs:Taxesonimports• Tradequotas:Limitsonthetotalvolumeofimportsthatcanenterthecountry

• Tradebarriersmaybenefitindividualfirmsorindustriesdomestically,buttheyarecostlytotheeconomyasawhole

• Decreasethetotalamountoftradethatoccursbetweencountries• Increasethepriceofthetradedgood• Hinderthebenefitsofspecializationandcomparativeadvantage

311

KeyTakeaways• Inanopeneconomy– goodsmarkets(netexports)andfinancialmarkets(netcapitalflows)arecloselylinked

• TherealexchangeratewilladjusttoequilibratetheNX-NCmarket

• Tradebarriersareusedtohelpdomesticproducers,buthurttheeconomyasawhole

312

Principles of MacroeconomicsModule 7.2 (b)

Exchange Rates and Net Exports

Net Exports and Exchange Rates• RecallthatNetExports:Exports– Imports

• Oneofthefactorsthataffectsexportandimportvolumesareexchangerates

• Exchangerates:Valueofonecountry’scurrencyintermsofanothercountry’scurrency

Example • Youcanuse1USdollartobuy0.87Euros• Theexchangerateforis1USD:0.87EUR• OneUSDisworth0.87EURs

Example • Ifyoucanuse1USdollartobuy0.87Eurosthenyoucanalsosay:• 1Eurowillbuyyou1.15USdollars

• 1USD=0.87EURà 1EUR=1/0.87USD=1.15USD

Example • Nowassumethattheexchangeratechangesassuch:• 1USDwillnowbuyyou0.95EUR

• ThevalueofUSDhasincreased• YoucanbuymoreEuroswiththatsame1USD• TheUSDhasappreciated

Example • Thisalsotellsyouthatif:• 1USDwillnowbuyyou0.95EUR• 1EUROwillbuyyou1.05USD

• ThevalueofEurohasdecreased• YoucanbuylessUSDwiththatsame1EUR• TheEURhasdepreciated

Exchange Rate Impact on Trade• IfthevalueofUSDhasincreased:(0.87EURto0.95EUR)• ValueofEURhasdecreased:(1.15USDto1.05USD)• ThevalueofUSgoodssoldinEuropehasincreased• USgoodsaremoreexpensiveinEurope• USexportstoEuropewilldecrease

• AppreciationofUSDwillleadtoadecreaseinexports(toEurope)• DepreciationofEURwillleadtoadecreaseinimports(fromUS)

Exchange Rate Impact on Trade• IfthevalueofUSDhasincreased:(0.87EURto0.95EUR)• ValueofEURhasdecreased:(1.15USDto1.05USD)• ThevalueofEuropeangoodssoldinUShasdecreased• EuropeangoodsarelessexpensiveinUS• EuropeanimportstoUSwillincrease

• AppreciationofUSDwillleadtoanincreaseinimports(fromEurope)• DepreciationofEURwillleadtoaincreaseinexports(toUS)

Exchange Rate Impact on Trade• IfthevalueofUSDhasincreased:(0.87EURto0.95EUR)• ValueofEURhasdecreased:(1.15USDto1.05USD)

• USExportsDecrease,ImportsIncrease=NetExportsDecrease• EUExportsIncrease,ImportsDecrease=NetExportsIncrease

Exchange Rates and Trade

ValueofUSD

INCREASES

USExports DecreaseUSNetExportsDecrease

USImports Increase

ValueofEUR

DECREASES

EUExports IncreaseEUNetExportsIncrease

EUImports Decrease

Exchange Rates and Trade

ValueofUSD

DECREASES

USExports IncreaseUSNetExportsIncrease

USImports Decrease

ValueofEUR

INCREASES

EUExports DecreaseEUNetExportsDecrease

EUImports Increase


ForeignExchangeMarketandExchangeRates

313

ExchangeRates

• Exchangeratesgivethepriceofonecurrencyintermsofanothercurrency

• EUR/USDà Amountofeuros(EUR)thatcanbepurchasedwithoneUSdollar(USD)

• Exchangeratesaredeterminedbytherelativesupplyanddemandforthetwocurrencies

314

Floatingvs.FixedExchangeRatePolicies

• Floatingexchangerates:valueoftheexchangerateisdeterminedbymarketforces(supplyanddemand)

• Fixedexchangerates:thevalueispredeterminedbyagovernmentbodyandthesupplyofcurrencyisalteredtomaintainthefixedexchangerate

315

DemandandSupplyofForeignExchange• DemandforUSD:DemandforUSDabroadcomesfromforeignerswantingtobuyUSexports

• SupplyofUSD:SupplyofUSDtoforeignexchangemarketsisdeterminedbyUSconsumers’demandforforeigngoods,orimports

• ForUSconsumerstobuyEuropeangoods, theyneedEuros• TogetEuros, theysellUSDinexchange

• EquilibriumExchangeRate:wheredemandforUSDfromabroadmeetssupplyofUSDinforeignexchangemarkets

316



• ForUSconsumerstobuyEuropeangoods,theyneedEuros

• TogetEuros,theysellUSDinexchange


317



• ForUSconsumerstobuyEuropeangoods, theyneedEuros• TogetEuros, theysellUSDinexchange


318

ExchangeRateDetermination

FactorsthataffectthedemandorsupplyofUSDtoforeignexchangemarketswillinfluencetheexchangerate

319


• InflationRates• IftheUShaslowerinflationthanEurope– USDwillappreciateagainsttheEuro

• Lowerinflationmeansthatthevalueofeachdollarishigher– peopleneedtoholdlessUSDtomakethesametransactions

• WithlessUSDincirculation– eachUSDismorevaluable,andthereforeitsvalueagainstothercurrenciesrise

320


• InterestRates• Higherinterestrateswillattractmorefinancialcapitalfromabroad

• NetcapitalinflowincreasesdemandforUSDandthereforepushingupthevalueofUSDrelativetoothercurrencies

321


• Country’sCurrentAccountBalance• Currentaccountreflectsthetradebalance– thedemandforexportsandsupplyofimports

• Currentaccountsurplusmeansthecountryisexportingmorethanimporting,leadingtoarelativelyhigherdemandforUSD–increasingthevalueofUSDrelativetoothercurrencies

322


• TermsofTrade• Termsoftraderefertotherelativepriceofexportstoimports

• Highertermsoftradereflectexportpricesrisingmorethanimportprices

• Becausethiswillreflectgreaterdemandforthecountry’scurrencytopayforthoseexports,thevalueofthecurrencywillriseandtheexchangerateappreciates

323


• PoliticalStability• Acountrywithmorepoliticalstabilityandlessriskwillattractmoreforeigninvestorsandforeigncapital

• Theinflowofforeigncapitalleadstoanincreaseinthevalueofthecurrency,orexchangerateappreciation

324


•GovernmentDebt• Countrieswithhighlevelsofgovernmentdebtwillhaveadifficulttimeattractingforeigncapitalinflows

• Foreigninvestorssellbondsiftheypredictincreasinggovernmentdebt,therebyleadingtoaweakerexchangerate

325


•Recession• Arecessioncorrespondsusuallytolowerinterestrates

• Withlowerinterestrates,foreigncapitalwillleavetheeconomy,searchingforhigherreturnselsewhere

• Thisnetcapitaloutflowleadsadecreaseinthevalueofthecurrency,orexchangeratedepreciation

326

KeyTakeaways• Exchangeratesreflecttherelativepriceofonecurrencyintermsofanother

• Demandforandsupplyofcurrencyaredeterminedbymarketforces,andtheexchangerateequilibratestoclearthemarket

• Certaindomesticeconomicconditionsdeterminetheexchangerate,aswellasforcesoutsideofthedomesticeconomy

327

Documents

Principles of Macroeconomics · 2017. 2. 2. · Balance of Payments • Current Account: The value of trade of goods and services across boarders •Capital Account: The monetary