OCR F585 Economics - Amazon S3s3-eu-west-1.amazonaws.com/.../sample-ocrf585-2016.pdf · Extract 2...
Transcript of OCR F585 Economics - Amazon S3s3-eu-west-1.amazonaws.com/.../sample-ocrf585-2016.pdf · Extract 2...
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Extract 2
Globalisation and balance of payments imbalances
Globalisation and Balance of Payments Imbalances
Extract 2
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Extract 2: Key Term Glossary
Key term Brief definition
Balance of Payments imbalances Persistent trade deficits or surpluses
Current account surplus Net external trade and income is positive
Current account deficitThe amount by which money relating to trade, investment income and transfers going out of a country is more than the amount coming in
Exchange rate index The trade-weighted value of a currency
Financial flows Flows of capital across national borders
Excess savings When gross national savings > investment
Capital account (BoP) Balance of investment flows
Depreciation Fall in the external value of a currency
Marshall Lerner ConditionA devaluation of a currency improves the BoP only if the combined (or sum of) price elasticities of demand for imports & exports are greater than one.
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Extract 2: Some Suggested Questions
1. Analyse two causes of a current account deficit in countries such as the United States
2. Analyse two causes of a current account surplus in countries such as China
3. Analyse why depreciation in the US dollar might not necessarily lead to a fall in their external deficit
4. Comment on two policies that might be used to correct a deficit on the current account of the balance of payments
5. Describe what is meant by balance of payments imbalances6. Distinguish between the current account and the capital
account of the balance of payments7. Distinguish between the current account and the capital
account of the balance of payments8. Evaluate the case for and against protectionism as a policy to
help prevent a recession and rising unemployment
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The Fast-Changing Global Economy
The world economy is changing rapidly! Since 1980 the share of global economic output has shifted towards Asian-Pacific countries who now dominate.
19.6%
22.7%
26.2%28.5%
31.4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1980 1990 2000 2010 2015
US EU-28 Asia-Pacific
Percentage share of world GDP, at current market prices & exchange rates
Source: IMF World Outlook
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Extract 2: Text and Commentary
• While globalisation has brought about an increase in the volume of world trade, it has also increased balance of payments imbalances.
• Much of the discussion about these global imbalances has focused on China’s current account surplus and the USA’s current account deficit
• Imbalances refer to the persistent current account surpluses for some countries contrasted with large current account deficits in other nations.
• The main way of measuring trade / current account imbalances is as a % of GDP
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Extract 2: Text and Commentary
• The period between 2007 and 2013 saw fluctuations in the current account deficit of the USA and in its effective exchange rate index.
• Changes in its effective exchange rate (see Fig. 2.2) did not always have the expected impact on the USA’s current account deficit.
• The USA runs a permanent (i.e. a structural) current account deficit.
• Countries running external deficits normally see their currency depreciate
• The size of the US external deficit halved from 2007 to 2009 – in large part due to the recession.
• It has since been fairly stable at around $200bn per year
• But real growth in the US economy post crisis has brought about a fall in the deficit as a % of US GDP
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Fig. 2.1 Current Account Balances of China and USA
China’s current account surplus has more than halved since peaking > $400bn in 2008. It has also declined as a % of China’s GDP
The US current account deficit has narrowed from over $700bn in 2007 to under $400bn in 2009 and has remained fairly stable at this level since – declining as a share of GDP
Surplus
Deficit
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Current Account Balances of China and USA (% of GDP)
China’s current account surplus measured as a share of GDP has diminished significantly since peaking at 10% of GDP in 2007.
The surplus averaged 2% of national output in 2012-2014
Surplus
Deficit
% of GDP is a better measure of the scale of a deficit or a surplus
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Fig. 2.2 Effective exchange rate index of US dollar ($)
Depreciation
Appreciation
Base Year for the Index
100
95
9899
104
99
103
Overall, the US dollar has been depreciating against a trade-weighted basket of other currencies. But the size of the changes in percentage terms in the external value of the $ have been small.
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US Dollar – Chinese Yuan Exchange Rate
China ends their fully-fixed exchange rate against the US dollar
Yuan per $1
Yuan appreciating v $
Effective return of a fixed exchange rate during the global financial crisis
China devalues the Yuan in summer of 2015
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How changes in the exchange rate affects trade balance
Depreciation in market value of the
US $
$ has fallen in value e.g. v Chinese Yuan
US goods and services cheaper in
foreign currency terms
Imports into the USA more
expensive prices in US $s
Demand for US exports should rise
Demand for US imports should fall
Ceteris paribus, value of US exports
will rise
Ceteris paribus, value of US imports
will fall
So the US trade deficit should reduce in size!
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Will an Exchange Rate Depreciation improve the BoP?
Time period after depreciation
Trade surplus
Trade deficit
Currency depreciation
here
Trade deficit may grow in the initial
period after depreciation
Net improvement in trade provided certain conditions are met –
known as the Marshall Lerner condition
The diagram below shows the “J Curve effect” – it shows the time lags between a falling currency and an improved trade balance