International Economics Trade, The Balance of Payments and Exchange Rates.
Balance of Payments 3/2/2012 Unit 3: Exchange Rates.
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Transcript of Balance of Payments 3/2/2012 Unit 3: Exchange Rates.
![Page 1: Balance of Payments 3/2/2012 Unit 3: Exchange Rates.](https://reader035.fdocuments.net/reader035/viewer/2022070408/56649e575503460f94b4fa1a/html5/thumbnails/1.jpg)
Balance of PaymentsBalance of Payments3/2/20123/2/2012
Unit 3: Exchange RatesUnit 3: Exchange Rates
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Balance of PaymentsBalance of Payments
balance of payments (BoP) balance of payments (BoP) –net movement of funds between a nation and a
foreign country
BoP identityCA + FA + KA = 0
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Gross National ExpenditureGross National Expenditure
gross national expenditure gross national expenditure (GNE) (GNE) –
total national spending on final goods and services
GNE = C + I + G
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Gross National ExpenditureGross National Expenditure
personal consumption (C) personal consumption (C) –total household spending on
final goods and services
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Gross National ExpenditureGross National Expenditure
gross private domestic gross private domestic investment (I) investment (I) –
total spending by firms and households on final goods
and services that add to the nation’s capital stock
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Gross National ExpenditureGross National Expenditure
government consumption government consumption expenditures and gross expenditures and gross
investment (G) investment (G) –government spending on final goods and services,
including additions to the capital stock
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Gross Domestic ProductGross Domestic Product
gross domestic product (GDP) gross domestic product (GDP) –total value added of all
production
value added value added –income paid to factors of
production;sales – intermediate purchases
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Gross National IncomeGross National Income
gross national income (GNI) gross national income (GNI) –income of all nationals
within a country
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Closed vs. Open EconomyClosed vs. Open Economy
In a closed economy there is no international trade and no
international financial movements; therefore:
GNE = GDP = GNI = GNDITB = NFIA = NUT = 0
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Closed vs. Open EconomyClosed vs. Open Economy
In an open economy GNE, GDP, and GNI need not be equal.
Transactions in thebalance of payments
affect the flow of spending, income, and production.
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Trade BalanceTrade Balance
trade balance (TB) trade balance (TB) –exports minus imports
GNE + TB = GDP
TB = EX – IM
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Some home spending is on foreign goods and some foreign
spending is on home goods.
We must deduct imports and adds exports to GNE to
calculate the total payments received by home firms.
Trade BalanceTrade Balance
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Trade BalanceTrade Balance
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Factor IncomeFactor Incomenet factor income from abroad net factor income from abroad
(NFIA) (NFIA) –one country is paid income by another, in compensation for
labor, capital, and land(e.g., wages, interest, dividends);
GDP + NFIA = GNI
NFIA = EXFS – IMFS
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Factor IncomeFactor IncomeSome home GDP might be
produced using “imported” foreign factors and some
foreign GDP might be produced using “exported” home factor.
We must subtract factor service imports and add factor service
exports to GDP to calculate income received by home.
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Factor IncomeFactor Income
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Unilateral TransfersUnilateral Transfersnet unilateral transfers (NUT) net unilateral transfers (NUT) –
net amount of transfersthe country receives from
the rest of the world
GNI + NUT = GNDI
NUT = UTIN – UTOUT
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Unilateral TransfersUnilateral TransfersCountry’s disposable income
may differ from income earned due to unilateral transfers paid
to and received from abroad (e.g., foreign aid).
gross national disposable gross national disposable income (GNDI) income (GNDI) –income available
including transfers
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Unilateral TransfersUnilateral Transfers
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AssetsAssetsfinancial account (FA) financial account (FA) –
asset exports minusasset imports
capital account (KA) capital account (KA) –assets transferred /
received as gifts
GNDI + FA + KA = GNEFA = EXA – IMA
KA = KAIN – KAOUT
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AssetsAssetsIncome is not the only resource by which an open economy can
finance expenditure.
The economy can affect its spending power by exporting or
importing assets internationally. Alternatively
spending power can be affected by transferring or receiving
assets as gifts.
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AssetsAssets
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Closed vs. Open EconomyClosed vs. Open EconomySo in the open economy you
can go from GNE to GDP to GNI to GNDI and back to GNE.
•Expenditure approacho GNE = C + I + G
•Product approacho GDP = GNE + TB
•Income approacho GNI = GDP + NFIA
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Balance of PaymentsBalance of Payments
Balance of Payments IdentityCA + FA + KA = 0
TB + NFIA + NUT + FA + KA = 0
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AssetsAssetscurrent account (CA) current account (CA) –
net movement of goods and services between a nation and a
foreign country;sum of the trade balance, net
factor income from abroad, and net unilateral transfers
CA = TB + NFIA + NUT
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From GNE to GDPFrom GNE to GDP
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From GDP to GNIFrom GDP to GNI
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From GNI to GNDIFrom GNI to GNDI
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Account BalancesAccount BalancesTB > 0 ≡ trade surplusTB < 0 ≡ trade deficit
CA > 0 ≡ current account surplusCA < 0 ≡ current account deficit
FA > 0 ≡ financial account surplusFA < 0 ≡ financial account deficit
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SavingSavingS = SP + SG
S = Y – C – GSP = Y – T – CSG = T – GS = SP + SG = (Y – T – C) + (T – G)
S ≡ total savingSP ≡ private savingSG ≡ government saving
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SavingSavingY = C + I + G + CAY – C – G = I + CA
S = I + CA
S > I if and only if CA > 0(current account surplus)
S < I if and only if CA < 0(current account deficit)
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SavingSaving
Twin deficitSP + SG = I + CA
CA = (SP – I) + SG
SG > 0 government budget surplusSG < 0 government budget deficit
CA > 0 current account surplusCA < 0 current account deficit