FREC 410
International Ag. Trade & Marketing
Macroeconomic Policies & Trade:
Balance of Payments (BOP) Accounting
Dr. Titus Awokuse
Reminder: Read Assigned Chapters in Pugel Text
http://www.udel.edu/FREC/Awokuse/FREC410_webpage.htm
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Balance of Payments
National Income Accounts
!
Gross National Product:
of all final goods and services produced by
a country’s factors in a given time period
" Measure of national activity
" Equals ______________________
!
Definition:
Is the ________________ recording all flows of
value between a nation’s residents and the
residents of the ROW during a period of time
!
Main kinds of Flows:
" Values
!
!
Income earned by all factors of production
"
"
GNP Components:
"
"
"
"
"
"
Consumption
Investment
________________________
Exports
Imports
"
"
"
3
Merchandise trade flows
Service flows
Income flows
Unilateral _____________________
Private capital (asset) flows
Official asset flows
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1
Importance of BOP
!
!
!
!
!
Transactions in BOP: Two types
Bridge linking all parts of int’l econ
Key to understanding ___________________
Connects govt borrowings abroad and domestic
consumption
Explains int’l _____________________________ and
money transfers
Includes all exchange of values and their links to
macroeconomic variables such as:
!
Exports or imports of ______ and Services
" Current
account (CA)
CA = (Exports – Imports)
! CA deficit: If (Exports < ____________)
! CA surplus: If (Exports > Imports)
" French consumer imports American Levi Jeans
! Enters US BOP as a credit on current account
!
!
National income
" Inflation
" Unemployment
"
Purchase or _________________ (wealth)
" Capital
!
account
Money, stocks, factories, govt debt, land, etc.
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6
Transactions in BOP
Capital Accounts
!
Records all int’l purchase or sale of assets
!
" American
buy French castle: ______ in US current
accounts
" Capital account balance:
! A nation’s net export and import of assets
!
Any exchange automatically enters the BOP twice:
"
"
!
Rules of Capital flows
As credit and debit of the same value
Application of accounting principle of “_________________”
bookkeeping
Example:
"
Jim bought $1000 of Olivetti Italian’s firm’s Typewriter
"
Olivetti deposits $1000 payment in US bank
!
" +ve
sign to sale of assets (________________)
! ____________ payments
" -ve sign to purchase of assets (_______________)
! Outflow of payments
!
"
"
7
US current account debit: with a –ve sign
US capital account credit: with a +ve sign
US importer must pay for purchases
Italian exporter must spend or store the payment
8
2
Role of Macroeconomics in Trade
Role of Macroeconomics in Trade
!
Periodical instability in agricultural due to:
" Seasonal
of natural resources and other inputs
" Government
" Foreign
Agriculture account for about 2% of US GNP,
but about 15% of all exports
!
Ag sector is very sensitive policies affecting:
weather changes
" Availability
" Changes
!
trade and _________________
in monetary policy
!
Exchange (______) Market fluctuations
"
___________________ and
"
exchange rates
Macroeconomic policies were major source of
cyclical variation in __________________ in the
1970s and 1980s
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10
Two Types of ER
Exchange Rates
Foreign Exchange (FOREX):
!
!
depends on timing of actual exchange
!
Spot ER:
is the act of trading different _______________
Exchange Rate (ER):
!
!
" is
Is the relative price of a nation’s currency in
terms of another (_________________ units
per U.S. dollar)
!
the price for “immediate” exchange (2 days)
Forward ER:
" is
the price for for an exchange that will occur in
the future (1-6 months)
$1.6355 per British pound sterling (£)
or £0.6114 per US dollar
!
11
Emphasis would be on spot ER
12
3
What Determines Exchange Rates?
!
Two types of Spot ER regimes:
!
Fixed ER
What Determines Exchange Rates?
!
" Central
banks _________________ to hold their ER at
internationally agreed level (ER pegged to US dollar)
!
" _____________
!
!
" Govt
moderate ______________________ without
keeping ER rigidly fixed
for foreign exchange
Who demand FOREX?
" _____________
Managed Floating ER:
" Focus
Markets set foreign ER in floating a system
for foreign exchange
Who supply FOREX?
on this type of ER
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What Determines Exchange Rates?
!
Key players in FOREX Market
" Commercial
!
" International
!
(Read Chapter in text)
financial institutions
Institutional investors like pension funds trade in foreign currency
" National
!
Overvaluation & Undervaluation
corporations
Make and __________________________ in foreign currencies
" Non-bank
!
banks
facilitates the exchange of interest-bearing bank deposits
central banks
Buy and sell foreign exchange as _________________________
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4
Exchange Rates: Over-valuation
Exchange Rates: Over-valuation
!
!
An over-valuation (_________________) of the
pound against the dollar is an increase in the
dollar price of pound:
!
HOW?
!
Higher demand for dollar in ______________ market
Example:
!
More dollar purchased by:
" Initially
" Then
!
" Importers
at: $1.6 per £
of US goods and services
" Individuals
changed to: $1.8 per £
– tourists to US
" International
An appreciation of a nation’s currency makes its
goods more expensive for foreigners (________
in exports)
" US
Corporations: ______________________
government for ____________________ reasons
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Exchange Rates: Over-valuation
!
Effects of over-valuation:
" Value
of domestic currency increase
" Cheaper
!
expensive exports
exports fall (since Px fall)
" Decrease
!
Exchange Rates: Undervaluation
imports rise ( since Pm fall)
" More
!
imports
inflation
since more supply available in domestic market due to
export decrease
19
20
5
Exchange Rates: Under-valuation
Exchange Rates: Under-valuation
!
An under-valuation (_________________) of the
pound against the dollar is a fall in the dollar price
of pound:
" e.g.
!
HOW?
!
_____________ of dollar in foreign exchange market
!
More pound purchased by:
" Importers
$1.6 per £ # $1.3 per £
of British goods and services
" Individuals
!
A depreciation of a nation’s currency makes its
goods ___________________ (increase in exports)
– __________________
" International
" UK
Corporations: wages to UK residents
government for monetary policy reasons
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22
Effects of under-valuation:
! Value of domestic currency decrease
" More expensive imports
!
"
Money Supply & Interest Rates
Cheaper exports
!
"
Monetary Policies & Trade:
imports fall (______________)
exports rise (since Px rise)
Increase inflation --- since less supply available in
domestic market due to ___________________
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6
Exchange Rates and Money Supply
!
Exchange Rates and Interest Rates
Effects of expansion of money supply
" More
"
!
Foreign exchange market is very sensitive to
movements in interest rates
!
Effects of higher domestic interest rates
currency in circulation
Value of ___________________ decrease
" Implications
for trade?
" Incentive
!
for foreign investors to to invest in bonds
denominated in dollars
Effects of tightened money supply
" Less
"
" Demand
____________________________
" Domestic
Value of domestic currency increase
" What
for domestic currency rises
currency appreciates in value
" Implications
are implications for trade?
for trade?
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Importing Country Devaluation
(Exporting Country Overvaluation)
!
Pm= EPx
World Mkt
Exporter
Graphical Analysis:
P
P
Overvaluation & Undervaluation
Importer
P
Sx
Dx
Pw
Dm
Sm
ES
Pm
Pw
Pw
Px
ED
ED2
A C
Px
27
D
Sx
Dx
B
Qw2
Q
Pw
Qw
Qw
W
Q
Pm
Y
Sm
Z X
Q
Dm
28
7
Importing Country Devaluation
(Exporting Country Overvaluation)
!
Import Currency Overvaluation
!
Pm = EPx
Assume:
World Mkt
Exporter
Importing Country is United States
" Exporting Country is UK
Importer
"
!
Similar to effect of an _________________ import tax
"
Currency value (_______________________) decrease
"
More expensive imports --- Imports fall
"
Cheaper exports --- since Px falls
P
P
Px
P
Pw
Pw
Pw
Sm
ES
Sx
Dx
Dm
ED2
Pm
ED
!
But ER overvaluation affect prices of _______________
!
It’s not targeted like an import tariff
C A
Px
29
B C
Sx
Dx
Qw
Q
Pw
Qw
Qw2
Q
Y W
Pm
X Z Q
Sm
Dm
30
Importing Country Overvaluation
(Exporting Country Devaluation)
!
Assume:
"
"
!
Importing Country is United States
Exporting Country is UK
Similar to effect of an Ad Valorem import subsidy
Currency value (purchasing power) increase
Increase in imports
" Decrease in exports -- since Px rises
"
"
!
But ER overvaluation affect prices of ALL goods
!
It’s not targeted like an ___________________
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