Balance of Payments
Current Account data is for 1998
Balance of Payments Accounting
current acct + nonofficial capital acct + official capital acct + ) SDR + SD / 0
• Two important Rules
– Credit sales of U.S. goods, services, and assets
to foreigners. Debit purchases of foreign goods,
services and assets by U.S. residents.
– Every transaction involves a simultaneous
credit and debit => identity: sum of the credits
and debits = 0.
Current Account
• Includes transactions dealing with:
– goods
– services = royalties, license fees, traveling, shipping, banking, insurance,
consulting fees
– transfer payments
– income receipts = dividends, interest earnings, repatriated profits, compensation
of employees
• sub-accounts:
– merchandise trade balance
– balance on goods and services
– income account (old investment income account + compensation of employees)
• Depends on:
–
–
–
–
–
Domestic versus foreign prices
Exchange rate movements
Foreign income
Domestic income
Market impediments
Current Account for North and South
American Countries
-50
-100
-150
Venezuela
Columbia
Chile
Brazil
Argentina
Mexico
-250
Canada
-200
USA
Billions of U.S. $
0
-20
China
Vietnam (97)
Indonesia
Thailand
Singapore
Philippines (97)
New Zealand
Malaysia (97)
Korea
Japan
India
Hong Kong (97)
Australia
Billions of U.S. $
Current Account for Asian Countries
50
40
30
20
10
0
-10
-10
South Africa
Sweden (97)
Switzerland
UK
Sweden
Spain
Portugal
Netherlands (97)
Italy
Germany
France
Finland
Beligium
Billions of U.S. $
Current Account for European
Countries and South Africa
25
20
15
10
5
0
-5
0
-1
-2
-3
-4
Venezuela
Columbia
Chile
Brazil
Argentina
Mexico
-6
Canada
-5
USA
Current Acct % of GNP
Current Account as a percent of GNP for North and
South American Countries
Current Acct % of GNP
12
10
8
6
4
2
0
-2
-4
-6
-8
China
Vietnam (97)
Indonesia
Thailand
Singapore
Philippines (97)
New Zealand
Malaysia (97)
Korea
Japan
India
Hong Kong (97)
Australia
Current Account as a percentage of GNP
for Asian Countries
-8
South Africa
Sweden (97)
Switzerland
UK
Sweden
Spain
Portugal
Netherlands (97)
Italy
Germany
France
Finland
Beligium
Current Acct % of GNP
Current Account as a percentage of GNP for European
Countries and South Africa
10
8
6
4
2
0
-2
-4
-6
Investment Income Account
• Positive from 1946 to 1993, but started to
decline in 1983
• Negative in 1994: U.S. owned $2.6 trillion
(market value) of foreign assets and foreigners
owned $3.5 trillion of U.S. assets
• In 1999, investment income receipts on U.S.
assets abroad = $274 billion and income
payments to foreigners = $287 billion => $13
billion dollar deficit
Are Deficits a Problem?
•
•
•
•
•
•
Deficit with Japan: Japanese import more per capita from U.S. than U.S. does from
Japan.
According to Kenneth Kasa (San Francisco Fed) As U.S. baby boomers come to age
saving will increase and as Japanese retire their spending will increase => U.S. current
account deficit will shrink. (Modigliani Life-Cyle model).
Twin deficit problem? William Branson of Princeton: The U.S. government deficit causes
an inflow of capital from abroad, which in turn leads to a negative current account
balance.
Current Acct deficits => capital account surpluses => foreigners have a claim on future
real resources in the United States. True, but it is only a problem to the extent that
investments are portfolio investments used to finance unproductive government deficits.
Should focus on Trade Deficit/U.S. GDP instead of size of deficit.
Deficits are positively correlated to real GDP growth and negatively correlated to
unemployment rates (4.1% as of 10/99 lowest u rate in 29 years). From 1992 to 1997,
U.S. trade deficit almost tripled but industrial production increased 24% and
manufacturing output was up 27%. In Japan, the IPI was up only 8% and in Germany, the
IPI was up only 1%.
Nonofficial Capital Account 1999 in billions$
Nonofficial U.S. assets abroad, net (-, increase/capital outflow)
Direct Invest (10% min ownership)
Portfolio (securities)
Claims by U.S. banks
Claims by nonbanking concerns
other U.S. government
-430.2
-150.9
-128.6
-69.9
-92.3
+2.8
Nonofficial Foreign Assets in U.S., net (+, increase/capital inflow) +753.6
Direct investment
275.5
U.S. Treasury Securities
-20.5
U.S. currency
22.4
U.S. Sec. other than treasuries
331.5
Liabilities reported U.S. banks
67.4
Liabilities reported by U.S. nonbanks 34.3
Points of Interest
1. From 1983 to present, nonofficial K acct > 0. Why?
- High savings rate abroad
- U.S. government deficit
- Since 1986, the best and safest place to invest
- 1987 U.S. became a net debtor nation (Humpage, Cleveland Fed) (See U.S. external
debt/GDP), note Canada and Australia debt burden is 3 to 5 times that of the U.S.
2. Direct depends on
-availability of raw materials, skills, infrastructure
-political risks (Russia in Oct 99, nationalized a firm 54% foreign owned)
-tax incentives
-diversification gains
-cost savings with respect to transportation
3. Portfolio
-Difference in E(returns)
-E(percentage change in the exchange rate)
-Risk of default (Ecuador’s Sept 30 default on Brady Bonds)—they were collateralized
U.S. BOP Accounts
U.S. Current Account
1960
2.8
1970
2.3
1981
5.03
1994
-118.6
1998
-217.1
1999
-331.5
Non official K Acct Official K Acct
-5
3.6
-12
9.4
-25.8
-.22
85
44.9
173.8
-26.9
271.8
51.6
SD )SDR
-1
-.2 .867
25
1.093
-10.9
69.7
11.6
Have we lost manufacturing jobs because of trade?
• The U.S. Department of Commerce in 1991 completed a 2 ½ year
study. Their results revealed that during the 1980s, U.S.
manufacturing growth tripled and was then on par with Japan. In
1994, our manufacturing growth was twice that of both Japan and
Germany. The manufacturing share of GDP increased to the level
of output achieved in the 1960s. A study by Andre Warner of
Harvard and another study by the Federal Reserve confirmed these
results
• From 1959 to 1995, durable goods accounted for between 12 to
18% of GDP. As of the 2nd quarter of 1999, the durable
goods/GDP ratio was 17.4%.
• Total workers employed in manufacturing today are about the same
as the 1960s.
• 1980s and 1990s, 34 million jobs were created.
Have we lost manufacturing jobs because of trade?
• From 1987 to 1993, U.S. manufacturing X to the world increased
95% and increased 138% to Latin America and the Caribbean.
• From 1993 to 1998, manufacturing jobs increased by 600,000.
• U.S. leads in audio & video equipment, air conditioners, building
and construction hardware, computers and computer software,
environmental technology, medical equipment, chemicals,
navigational & survey equipment, telecommunications equipment,
semiconductors, and has 90% of the market for advanced
processors.
• Jeffrey Sachs and Andre Warner: reviewed dozens of countries
between the years 1970 to 1990 and found those open to trade had
average growth rates of 4.7% and those that were closed 1%.
Macroeconomic Determinants of Spot Exchange
Rate Movements
• Interest rates (short run)
– Expectation that the CB of Europe will increase interest rates is supporting
the euro (10-18 and 10-25)
– Lower wage pressures in the UK reduced pressure on the Bank of England
to raise interest rates and thus reduced the value of the pound relative to
the dollar (10-25)
– Czech koruna was boosted when the Czech National Bank cut its twoweek repurchase agreement rate today to a record low of 5.5% from
5.75% (10-27)
– Expectations of higher interest rates caused the dollar to slump (10-18)
• Inflation (long run, PPP theory)
– Inflationary pressures caused dollar to slump (10-18)
– If the employment cost index shows more than an expected 1.1% increase
in 3rd Q wages and salaries, renewed fears of inflation will cause the dollar
to drop (10-25)
Central Bank Influence
• Monetary Policy
– Bank of Japan’s plan to increase their money supply is being scrutinized by the
market (10-18)
– Bank of Japan is now expected not to change monetary policy on Wednesday helped
to stabilize exchange expectations about the yen => dollar dropped (10-26,27)
• Central Bank Intervention and CB announcements
– Analysts anticipate that the Bank of Japan may intervene to stop depreciation of
dollar below 102-104 range (10-18) Yen/$ = 102.3 as of 12/13/99.
– Euro CB chief Otmar Issing supported the Euro when he said he saw upside risks
changing interest rates from the downside to the upside => likely to raise interest
rates on Nov 4. Euro’s muted action gave weight to speculation that there is no
broad-based demand for the euro ahead of the year end (10-26)
– Euro CB president, Wim Duisenberg was not mincing words in touting the case for
tighter monetary policy in the euro zone, but euro was sold heavily despite
expectations that today’s M3 figures would indicate inflation => interest rates are
likely to be increased and E(euro) to rise in value. (10-27)
– Brazil’s CB intervened selling $ first time since Aug 18 => real increased (10-28)
More Determinants
• Capital Flows (short run if portfolio movement)
– Investors are moving assets out of U.S. markets => depreciates $ (10-18)
• Expected changes in real output
– U.S. expansion coming to an end at the same time Europe and Japan are growing
caused the dollar to drop (10-18)
• Current Account influence
– Investors in Japan are bringing money back to Japan because they are panicking or
suffering from increased risk aversion. WSJ says this is typical of investors from
countries with current account surpluses like yen, euro, Swiss franc (10-18)
– UK trade deficit narrowed => dollar down (10-26)
– Sept trade stats for Japan showed current account surplus shrinking 10% =>
consumers are buying more => Japanese economy is doing better => dollar down (1026)
– Ignores capital account influence
More Determinants
• Stock market fluctuations
– “The dollar will remain the slave of U.S. equity markets . . .” Strong performance in
U.S. equities is supporting the dollar’s relative value. (10-25)
– The dollar lost ground against the yen as markets declined in the U.S. (10-26)
– Mexican peso and Brazilian real dropped relative to the $ mostly tracking losses in
U.S. stock and bond markets (10-26)
• Macro leading indicators and macro fundamentals
– positive euro-zone data continues to pile up => stronger euro (10-25)
• Fiscal Policy
– Pork-barreling agreements in Japan fueled expectations of a fiscal boost for the yen
=> dollar down (10-26)
• Political events
– Indonesia rupiah traded higher as market welcomed the country’s new cabinet and
the new ties established to the IMF. (10-27)
• Contagion
– Thai baht and Singapore dollar shadowed the rupiah’s higher move (10-27)
• Regulations inhibiting imports => appreciate the domestic currency
Impact of exchange rate movements
• Price competitiveness position
– 12/10/99, the Yen is currently at 102.48 and up
17.57% relative to the dollar over the last year.
– 12/10/99, the Euro is at 1.0209 and has
decreased in value about 13.68% relative to the
dollar over the last year.
•
•
•
•
Cost competitiveness position
J curve effects on the Current Account
PPP Theory
Balance sheet and cash flow effects
J-curve effect: associated with the devaluation or
depreciation of a currency
• Current Account = PxX - PzZ
• If we devalue or depreciate the domestic currency, the domestic
price of imports rises immediately, the price of exports will rise
with a lag as our products attract a higher demand because they are
cheaper in terms of the foreign currency. The physical quantity of
exports will not increase immediately because it will take time add
to plant capacity to satisfy increased demand. We cannot cut back
on all imported goods immediately–we need time to find domestic
substitutes or inferior but cheaper foreign substitutes. In the short
run the elasticity of quantity movements is small (inelastic). Thus
the price of the import good rising dominates causing the BOT to
become a larger deficit or a smaller surplus. Eventually quantities
adjust and the BOT will become less of a deficit or a bigger
surplus.
PPP Theory:
1920s–Gustav Cassell
• The Exchange rate between two currencies is the
relative value of their monies.
• Law of one Price: adjusted for transactions,
transportation costs and market impediments, the
common currency price of traded goods should be
equal among countries.
• Absolute form S = Pf/Pus somewhat worthless
• Relative form %)S = %)Pf - )%Pus
PPP Problems
• PPP does not fit data well–there are many other factors
that influence exchange rates
• Problem measuring inflation rates–for nontraded goods
there is no commodity arbitrage
• Differential pricing by MNEs--they increase prices in
inelastic D countries and lower in elastic D countries
(depending on dumping laws)
• Restrictions on movements of goods--transportation
costs, tariffs, quotas
Germany: 12-9-99, DM/$ = 1.9159
DM/$
3.5
3
2.5
Spot
2
PPP
1.5
Real Exchange Rate
1
0.5
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
Thailand
12-9-99, Bhat/$ = 38.625 Fixed
Bhat/$
45
40
35
30
25
20
15
10
5
0
Spot
PPP
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Real Exchange Rate
Indonesia: 12-9-99, Rupiah/$ = 7225
Rupiah/$
12000
10000
8000
Spot
6000
PPP
Real Exchange Rate
4000
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
Malaysia: 12-9-99, Ringgit/$ = 3.8
Ringgit/$
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Spot
PPP
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Real Exchange Rate
South Korea: 12-9-99, Won/$ = 1130
Won/$
1600
1400
1200
1000
Spot
800
PPP
600
Real Exchange Rate
400
200
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
Mexico: 12-9-99, Peso/$ = 9.435
Peso/$
12
10
8
Spot
6
PPP
4
Real Exchange Rate
2
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
Venezuela: 12-9-99, Bolivar/$ = 642.4
Bolivar/$
800
700
600
500
400
300
200
100
0
Spot
PPP
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Real Exchange Rate
India: 12-9-99, Rupee/$ = 43.425
Rupee/$
45
40
35
30
25
20
15
10
5
0
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
Spot
PPP
Real Exchange Rate