Current Account

  • Balance of payments on goods and services plus net international transfer payments and factor income

  • Sales and purchases of goods and services

    • Payments from foreigners: $2,000,000

    • Payments to foreigners: $2,500,000

    • Net: -$500,000

  • Factor Income

    • Payments from foreigners: $800,000

    • Payments to foreigners: $600,000

    • Net: $200,000

  • International Transfers

    • funds sent by residents of one country to residents of another

    • Net: -$100,000

  • Current Account (CA) = Net foreign sales of goods and services + net factor income + net international transfer = -500,000 + 200,000 - 100,000 = -400,000

  • Current account deficit: CA < 0

  • Current account surplus: CA > 0

  • Another Example

    Current account Exports of goods and services Imports of goods and services Net interest income Net transfers Current account balance Billions of dollars +1 ,754 -2,215 +167 -142 —436

Financial Account

  • The difference between a country's sale of assets to foreigners and purchases of assets from foreigners during a given period

  • Official asset sales and purchases

    • Payment from foreigners: $500,000

    • Payment to foreigners: $600,000

    • Net -$100,000

  • Private sale and purchases of assets

    • Payment from foreigners: $600,000

    • Payment to foreigners: $100,000

    • Net: $500,000

  • Financial Account

    • FA = -$100,000 + $500,000 = $400,000

  • Another Example

    Capital and financial account Foreign investment in the United States U.S. investment abroad Statistical discrepancy Capital and financial account balance +1 , 408 -l ,200 231 +439

Balance of Payments Account

  • Summary of a country's transactions with another country

    The U.S. Balance of Payments in 2008 (billions of dollars) 1 Sales and purchases of goods and services 2 Factor income 3 Transfers Current account Official asset sales 4 and purchases Private sales and 5 purchases of assets Financial account Total Payments from foreigners $1 ,827 765 487 47 Payments to foreigners $2,523 646 530 534 Net \_$696 119 128 -705 581 538 -167

    Capital and financial account Official settlements account .2 1980 Current account 1 985 1 990 1 995 2000 2005 2010

  • Current Account (CA) + Financial Account (FA) = 0

  • Or, CA = -FA

  • Payment to the US for goods and services, factor income, and transfers + Payments to the United States for assets = - (Payments to the rest of the world for goods and services, factor income, and transfers + Payments to the rest of the world for assets)

  • A country's financial account measures its net sales of assets, such as currencies, securities and factories, to foreigners

    • These assets are exchanged for financial capital

    • Measure of capital inflows in the form of foreign saving that become available to finance domoestic investment spending

    Payments to the rest of the world for assets Payments to the rest of the world for goods and services, factor income, and transfers United States Payments to the United States for goods and services, factor income, and transfers Payments to the United States for assets Rest of world

Financial Account and Loanable Supplies

  • Foreign Direct Investment

    • Assume all flows come in the form of loans

    • Purchases of stock in foreign companies and real estate as well as foreign direct investment, in which companies build factories or acquire other assets directly

  • Exchange Rates

    • We'll ignore the effects of expected changes in the exchange rate for now

  • Assume that the equilibrium interest rate in The Loanable Funds Model is 4%

    Interest rate Equilibrium interest s Quantity of loanable funds

  • Assume that the equilibrium interest rate in the US is 6% and that in Britain it is 2%. What will happen?

    • Capital inflow to the United States and Capital outflow from Britain

    • Investors prefer higher real interest rates to lower real interest rates

Interest rate 6% Equilibrium interest rate in the IJnited States (a) United States sus Quantity of loanable funds Interest rate Equilibrium interest rate in Britain 2% (b) Britain Quantity of loanable funds

Interest rate (a) United States sus Dus Interest rate International equilibrium interest rate 4% Quantity of loanable funds Capital inflow to the United States (b) Britain DB Capital outflow from Britain Quantity of loanable funds

GDP, GNP, and the Current Account

  • The basic equation for national income accounting

    • Y = C + I + G + NX

    • Y = C + I + G + X - IM

    • (NX = X - IM)

  • Why doesn’t the national income equation use the current account as a whole?

    • GDP it the value of goods and service produced in a country

    • It does not include international factor income and international transfers

  • GNP, or Gross National Product, does include international factor income

  • Why do we use GDP and not GNP?

    • The intent was to track production not income

    • Data on international factor income and transfer payments generally considered unreliable

Global Saving Glut

  • In the early 21st century, the United States entered into a massive current account deficit

    • The US imports more than it exports in a given year

    • US takes in a lot of capital inflow form the rest of the world, most notably China

  • How did this happen?

    • Former Fed Chairman Ben Bernanke in 2005 (a Fed Governor at the time) said that this "global saving glut" led to excess investment spending in the US

    • Because of the financial crises in the late 20th century, other countries found the US as an attractive destination despite low interest rates

    C:\\F359C6C5\\9BC69D0C-DC4A-464F-8EBF-7C4DE0F84205\_files\\image116.png

Practice Questions

  • On a Loanable Funds graph, show what would happen if there are capital inflows to a country with a 6% interest rate? When supply increased, what happened to the interest rate?

    C:\\F359C6C5\\9BC69D0C-DC4A-464F-8EBF-7C4DE0F84205\_files\\image117.png

  • Which of the following will increase the demand for loanable fund in a country

    a. Government budget surplus

    b. Decreased private saving rate

    c. A recession

    d. Decreased investment opportunities

    e. Economic growth

    Answer: e

    C:\\F359C6C5\\9BC69D0C-DC4A-464F-8EBF-7C4DE0F84205\_files\\image118.png

  • Suppose China decides to start a huge program of infrastructure spending, which it will finance by borrowing. How will this program affect the US Balance of Payments

    a. CA increases, FA increases

    b. CA decreases, FA decreases

    c. CA decreases, FA increases

    d. CA increases, FA decreases

    e. None of the above

    Answer: d

    CA = - FA

results matching ""

    No results matching ""