TÀI CHÍNH QUỐC TẾ 7 BP

Nguyễn Phúc Hiền - ðại học Ngoại thương 8 these recepts or payments for which there is no corresponding quid pro quo one way such as migrant workers‘s remittance to their families, th

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VII Balance of Payment-BP

Money is just something to make bookkeeping convenient

H.L.Hunt

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TS Nguyễn Phúc Hiền - ðại học

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Outline

Payments

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1 Concept

Balance of Payment(BP) is a statistical record of all

economic transactions between residents of the

reporting country and resident of the rest of the world during a given time, usually a year

• It reveals how many goods and services the country has

been exporting and importing and where the country has been borrowing and lending money to the rest of the

world

• Domestic and foreign residents, residents comprise

individuals, households, firms and the public authorities

• Conditions of a country‘s resident (domestic resident):

- Staying time > 12 months

- The residency country‘s income

• If anyone is not enough two above conditions is

considered as foreign residents

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1 Concept

is domestic and foreign residents:

• Residency and citizentship are not necessarily the same

• International organisations such as IMF, WB, ADB so on

are foreign residents, even though they actually are

located in the reporting country

• Ambassies, military bases abroad, the oversea students,

tourists so on are foreign residents

• Multinational companies are definition resident in more

than one country

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1 Concept

the BP is that it must involve a transaction

between a resident of the reporting country

and a resident of the rest of the world

domestic residents or foreign resident and

foreign resident are excluded in the BP

• Home currency (developed countries)

• USD or Euro (developing countries)

• SDR (IMF)

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a Current account

domestic residents and foreign residents

such as rice, coffee, textile, automobile,

machinary

Logistics, tourism, banking, finance, insurance, constructing and others

Recepts and payments of interest, dividends and profits are reported

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these recepts or payments for which there is

no corresponding quid pro quo (one way) such

as migrant workers‘s remittance to their

families, the payment of pension to foreign

residents and foreign aids

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Current account balanceCurrent account balance (percent of GDP at current market price)

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Balance of service, income and others,

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Influence on trade balance and services

Depend on elasticity of import or export goods and

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Trade balance and exchange rate Vietnam

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Trade balance and exchange rate China

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b Capital Account

movements of financial capital into or out of the country such as borrowing, sales of

oversea assets and investment by foreigners (inflow capital-credits) or capital leaves the

country (outflow capital-debit).

between domestic residents and foreign

residents

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b Capital Account

maturity)

Foreign direct investment

Foreign indirect investment: bonds (goverment and

corporation), equity

Credit by the public (ODA) and credit by the private

Short term credit

Foreign indirect investment

Foreign exchange transaction

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fundamental change in direction of balance of payment

sign of a worsening economic situation

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c Net error omission

Reflecting errors of statistics during record

transactions of current account and

capital account (statistic discrepancy)

Due to:

• An impossible task to keep track of all the transactions

between domestic and foreign residents

• Many reported statistics are based on sampling derived

from separate sources

• Desire to avoid taxes, some transactions are

underreported or illegal transactions

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d Overall Balance

OB = CA + K + OM

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Official Settlement Balance (OSB) or Official Financing Balance (OFB)

(loans – L)

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Total reserves of Vietnam (in USD)

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Each transaction between domestic and foreign

residents has two sides to it, a recept and a

payment

Principle

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3 Principles of Balance of Payments Accounting

goods and services, interests, dividend,

profit )

foreign assets )

goods and services, interest, dividend )

purchase of foreign asset )

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4 Balance of Payment Deficit or

Surplus

refered to a deficit or surplus of sub-account of the balance of payment

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Surplus

Impact strongly on macroeconomic indicators such as

exchange rate, growth and inflation and vice versa

• Surplus current account

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Is a major part of the current account

Represent direction of the current account

Impact strongly on exchange rate and vice versa

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Current Account and trade balance, Vietnam

percent of GDP at current market price

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Surplus

setlement account:

- Reduced foreign reserves

- Borrowing from other central banks and IMF

managed float exchange rate

exchange rate

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5 Elasticity and Absorption

Approaches

Concept:

• The elasticity approach examines how exchange rate

induced changes in the relative prices between domestic and foreign goods affect ceretis paribus the trade

balance

• The elasticity approach emphasizes price changes as a

determinant of nation‘s balance of payment and

exchange rate

• The elasticity approach is helpful in understanding the

different outcomes that might arise from short to long term

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Elasticity Approach

the percentage of change in exports over the percentage

change in price as represented by percentage change in

exchange rate.

the percentage of change in imports over the percentage

change in price as represented by percentage change in

exchange rate.

S ds

X

dx e

M

dm e

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Elasticity Approach

Martin Feldstein (Economic Aadviser of the

Present) 1985: „To remedy our trade deficit, the real value of the dollar must decline by enough to reverse its nearly 70 percent rise in the past five years“

Transformation of theory into Economic Policy

• Sep 1985 Plaza Agreement: Appreciation of Yen and DM

against the Dollar (elasticity optimism)

• Since 2001 Pressure on China to appreciate the Yuan

(The Case for New Plaza Agreement, Cline 2005)

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• In case of depreciation of the domestic currency, exports

become c.p cheaper in terms of foreign currency

• In the short term quantities do not adjust, only price in

foreign currency decline Nominal exports decline c.p

• In the longer term the export volume rises because of

lower prices in foreign currency Nominal exports rise as well

• Trade balance deteriorate first and improve afterwards

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Pass-Through Analysis

Concept

exchange rate changes are transmitted on the import prices in foreign currency

from country to country

Different Degrees of Pass-Through

(in domestic currency) equals the exchange rate change

(producer currency pricing)

stay constant (pricing to market)

change less than exchange rate‘s change

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(2) Absorbtion Approach

Concept

• In contrast to the elasticity approach, the absorbtion

approach does not define the current and financial

account balance as a result of exchange rate changes

• Instead, the balance of domestic production (Y) and

domestic spending-absorbtion (A) matters

• „A country‘s net foreign trade balance is equal to the

difference between the total goods and services

produced in that country and the total goods and

services take off the market domestically“ (Alexander

1952, 264-265)

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Absorbtion

• The absorbtion A equals all goods, which are „absorbed“

by the domestic market, i.e Consumption (C),

investment (I) and government spending (G)

• A = C+I+G (1)

Derivation of the Current Account Balance (CA)

• Y equals the overall domestic (net) production of goods

and it holds Y = C+I+G+X-M (2)

• Substituting (1) into (2) it implied Y-A =X-M=CA (3)

Reference to Savings

• From Y-C-G = S(saving) → Y = S+C+G (4)

• It implied S-I = X-M=CA (5)

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Implication

• The current account balance reflects the difference

between domestic supply and demand (saving and

investment)

• If an economy produces (saving) more than demand

(investment) the current account balance is positive

• If an economy produces (saving) less than demand

(investment), the current account balance is negative

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6 Some Open Economy Identies

Y= C+I+G+(Ex-Im) Ex-Im= Y-(C+I+G)

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