Nancy K. Ware
Instructor
Gainesville High School
1.
What is meaning of the balance
of payments accounts?
2.
What are the determinants of
international capital flows?
•Current Account
• Net Exports
• Trade Balance
• Factor Income
• Transfers
•Financial Account
•Current/Financial Relationship
1. Examples:
2. Examples:
3. Examples:
These 3 rows are
called
____________
____________
These 2 rows are
called
____________
____________
AKA: __________ account
4. Examples:
5. Examples:
1. Examples: U.S.
exports cars to be
sold in Canada &
U.S. imports oil
from Venezuela
2. Examples: profits of foreignowned corporations or labor
income from native-born workers
who work overseas Wal-Mart
earns profit from stores in
Europe. Honda produces and sells
cars in Indiana & other U.S.
states
3. Examples: Mainly shows
remittances that immigrants
employed in the United
States, send to their families
in their country of origin
These 3 rows are
called Current
Account
These 2 rows are
called Financial
Account
4. Example: When
the central bank of
China purchases a
U.S. Treasury, cash
flows from China to
the U.S. & vice
versa
5. Example: When Coca-Cola buys a factory in Mexico, this is an asset
purchase and payment to foreigners.
If a Brazilian company buys an apartment building in Boston, this is an
asset sale, and payment to foreigners.
1.
Transactions that don’t create liabilities: balance of payments on
c___________account (usually just simply referred to as c___________account)
2.
CA: the balance of payments on g__________& s__________ + plus f_________
income + net international t____________payments.
3.
**Most important part of the current account: the balance of payments on
g________ & s________, which ia the difference between the v__________of
exports and the v_________of imports (value of X-M trade) during a given
period.
4.
The merchandise trade balance, (or simply trade balance) is the difference
between a country’s exports and imports of goods alone—not including
s____________.
5.
The current account consists of international transactions that _________create
liabilities.
6.
Transactions that involve the sale or purchase of assets, and therefore DO create
future liabilities, are considered part of the balance of payments on
f_____________ account, or just simply known as the f______________ account
(also known as the capital account back in the day)for short.
1.
Transactions that don’t create liabilities :balance of payments on
current account (usually just referred to as current account )
2.
CA: the balance of payments on goods and services + plus factor
income + net international transfer payments.
3.
**Most important part of the current account: the balance of payments
on goods and services, the difference between the value of exports
and the value of imports (value of X-M trade) during a given period.
4.
The merchandise trade balance, (or simply trade balance) is the
difference between a country’s exports and imports of goods alone—not
including services.
5.
The current account consists of international transactions that don’t
create liabilities.
6.
Transactions that involve the sale or purchase of assets, and therefore
DO create future liabilities, are considered part of the balance of
payments on financial account, or the financial account (also known
as the capital account back in the day)for short.
The current account and the financial account must sum to z______:
Current account (CA) + Financial account (FA) = _____
or
CA = -FA
Why must the current account and financial account sum to zero?
Hint: Happiness runs in a circular motion! Can you Draw it?
The current account and the financial account must sum to z______:
Current account (CA) + Financial account (FA) = _____
or
CA = -FA
Why must the current account and financial account sum to zero?
Hint: Happiness runs in a circular motion! Can you Draw it?
People, businesses & governments will save and invest where their money
yields the highest returns (interest rates, low inflation & low expected
inflation).
r%
SLF 1 USA
SLF USA
r%
SLF China
SLF 1 China
DLF USA
QLF USA
What is happening in this graph?
DLF China
What is happening in this graph?
QLF China
People, businesses & governments will save and invest where their money
yields the highest returns (interest rates, low inflation & low expected
inflation).
r%
SLF 1 USA
SLF USA
r%
SLF China
SLF 1 China
DLF USA
QLF USA
MS in US is decreasing;
Debit to the US Financial
Account or Capital Outflow
DLF China
MS in China is increasing,
Credit to the Chinese
Financial Account or
Capital Inflow
QLF China
What determines whether money flows into a nation’s financial account?
1.
2.
3.
The loanable funds market model is used to model the flow of f_________
c________from one nation to another.
2 assumptions:
1. All flows are loans.
2. Ignore effects of expected changes in exchange rates
Suppose that the real interest rate in the US is 3% and the real interest rate in
Australia is 7%. Draw two side-by-side markets and show how the real interest rate
in Australia is significantly higher. Show on your graphs the increase and the
decrease in LF in both markets.
What determines whether money flows into a nation’s financial
account?
1.
More investment opportunities
2.
High demand for capital
3.
High return for investors
The loanable funds market model is used to model the flow of
financial capital from one nation to another.
2 assumptions:
1. All flows are loans. (In reality, capital flows take many forms:
purchases of shares of stock in foreign companies, foreign real estate,
direct foreign investment, in which companies build factories or
acquire other productive assets abroad)
2. Ignore effects of expected changes in exchange rates (the values
of different national currencies)
Suppose that the real interest rate in the US is 3% and the real
interest rate in Australia is 7%. Draw two side-by-side markets and
show how the real interest rate in Australia is significantly higher.
1.
Since the real interest rate is higher in Australia, what will
savers in the United States do with their money?
2.
Individuals and firms in the U.S. begin to purchase financial
assets in Australia, sending ______ as payment to Australia.
3.
The US is exporting US dollars and importing f________
a______.
4.
Australia is exporting f______________ a___________and
importing US d__________.
5.
These dollars serve as capital inflow in Australia, and capital
outflow from the U.S. When does the flow of US dollars to
Australia end?
1.
Since the real interest rate is higher in Australia, what will
savers in the United States do with their money? Savers in
the U.S. begin to look for countries like Australia where the
return on a financial asset is higher!
2.
Individuals and firms in the U.S. begin to purchase financial
assets in Japan, sending dollars as payment to Australia.
3.
The US is exporting dollars and importing financial assets.
4.
Australia is exporting financial assets and importing US
dollars.
5.
These dollars serve as capital inflow in Australia, and capital
outflow from the U.S. When does the flow of US dollars to
Australia end? when the interest rate evens out, maybe 5%.
1. Differences in economic growth rates:
2. Differences in savings rates:
•
Fast growing economy = ________
investment opportunities
• International differences in the
supply of funds reflect differences
in s___________ across countries
•
Slowly growing economy = ________
investment opportunities
• Result: this influences private
s__________ rates, which vary
widely among countries
•
Higher demand for capital offers higher
r__________ to investors than a slowly
growing economy
•
Result: capital tends to flow from
s_________ growing to f__________
growing economies (ex. China)
• Private savings rates may also
reflect differences in savings by
g______________. In particular,
government budget deficits,
which reduce overall national
savings, can lead to capital
inflows
1. Differences in economic growth rates:
2. Differences in savings rates:
•
Fast growing economy = more
investment opportunities
• International differences in the
supply of funds reflect differences
in savings across countries
•
Slowly growing economy = less
investment opportunities
• Result: differences in private
savings rates, which vary widely
among countries
•
Higher demand for capital offers higher
returns to investors than a slowly
growing economy
•
Result: capital tends to flow from slowly
growing to rapidly growing economies
(ex. China)
• Savings rates may also reflect
differences in savings by
governments. In particular,
government budget deficits,
which reduce overall national
savings, can lead to capital
inflows
•Capital moves in both directions!
•Differences in individual investor's incentives:
Financial investors in the US are sending $$$ to
China because interest rates might be higher, but
China investors are sending $$$ to the US stock
market because they believe the US economy has
a brighter future (NYSE is over 15,000)
•Financial specialization: Corporations diversify
financial risk by both selling shares of their own
stock to foreign investors, but also by purchasing
foreign shares of stocks or foreign bonds
•Countries can be both creditors and debtors
simultaneously
USAA
&
China
Joined at the HIP
Module
41 Review Questions
p. 419 – 420
Read
Module 42 p. 421 - 429