International Finance 407. Balance of Payments. Zhen Huo Teaching Fellow: Max Perez Leon. Yale University. Wednesday 31 st August, 2016

Transcription

1 International Finance 407 Balance of Payments Zhen Huo Teaching Fellow: Max Perez Leon Yale University Wednesday 31 st August, /24

2 Motivation: International Economics The study of micro & macro issues in an inderdependent world dependence through trade and capital flows International Finance mostly interested in the second whereas International Trade in the first This class will study important large-scale economic problems focus on capital flows, but need to be understood in conjuction with trade flows how these flows affect economic activity and the economic fate of countries recent global events: macroeconomic imbalances, debt crises, macroeconomic comovement, currency crises, etc 2/24

3 This Class Balance of Payments Accounting Current Account and National Accounting Global Imbalances 3/24

4 Balance of Payments Accounting: Records International Transactions Current Account: records trade transactions and income from abroad Exports - Imports + International income receipts - Payments to foreigners Japanese TV imported: an American CEO s income from trip to Germany to advise a company: + in both cases there is an offseting entry in the financial account Financial Account: records net change in ownership of assets Increase in foreign ownership of domestic assets - Increase in domestic ownership of foreign assets giving dollars to Japanese companies: + receive Euros from Germany companies: purchasing a residence abroad: import of assets and export of dollars for the purchase 4/24

5 Fundamental Balance of Payments Identity Balance of Payment: Current Account+Financial Account=0 every movement of goods is offset by a balancing movement of financial asset a U.S. retailer imports $1 of Japanese TVs US current account goes down by $1 a corresponding flow of money to the Japanese producer and the US financial account increases by $1 Current Account and the Financial Account in more detail 5/24

6 Current Account Current Account = Trade Balance + Net income from abroad = Trade Balance+ Income Balance + Net Unilateral Transfers Trade Balance Merchandise: Exports - Imports of goods Services: Exports - Imports of services Income Balance Net investment income: Net income receipts from assets Net international compensation to employees: Net compensation of employees Net Unilateral Transfers Gifts or grants received from foreign countries minus gifts or grants to foreign countries 6/24

7 Current Account: Examples Trade Balance Merchandise: Imports of Samsung from Korea, Export of ipod to France + Services: Drinks in Paris bars, German tourist watching Broadway + Income Balance Net compensation to employee: stipend paid to foreign students in US Net investment income: dividends for US bondholders of German stocks + Net Unilateral Transfers Charity gift to Haiti, Americans send money to relatives in Europe 7/24

8 Current Account Current Account Figure: US Current Account, Source: Bureau of Economic Analysis 8/24

9 Trade Balance and the Current Account In most countries, trade balance is the main driver of the current account except in cases where debt forgiveness and direct transfers are large amounts Figure: Trade Balance and Current Account as a Fraction of GDP. Source, IMF 9/24

10 US Current Account and Trade Balance to GDP 10/24

11 Trade Balance and the Current Account Figure: Trade Balance and Current Account Balance across Countries 11/24

12 Current Account and National Accounting 12/24

13 National Accounting and the Current Account National Accounting GDP = Gross National Expenditure + Trade Balance = Consumption+Investment+Government Spending + Trade Balance GNI (Gross National Income)=GDP + Income Balance GNDI (Gross National Disposable Income)=GNI+Net Unil. Transfers Current account GNDI=Consumption+Investment+Government Spending+Current Account National Saving: S = Y C G = I + CA Current account: CA = S I 13/24

14 Current Account, Savings and Investment CA surplus: the country saves more than it s investment needs wealth increases CA deficit: the country saves less than it s investment needs wealth decreases Non-zero CA: changes in Net International Investment Position (NIIP) NIIP=foreign assets owned by US residents - US assets owned by foreigners CA is a flow NIIP is a stock. They are related through CA = NIIP + valuation we will return to the change of valuation later 14/24

15 Global Imbalances 15/24

16 Global Imbalances over time Definition Global Imbalance is the phenomenon of persistent current account surpluses or deficits for some countries, that leads eventually to the accumulation of assets or financial liabilities from those countries How does this come about? 16/24

17 US Current Account and Trade Balance to GDP 17/24

18 Global Imbalances over time Figure: Current Account Imbalances. Source Feenstra and Taylor, 2010 (F&T) 18/24

19 Global Imbalances over time Figure: Current Account, Saving and Investment as a Fraction of GDP. Source: F&T. 19/24

20 Study case: US CA and China What are the implications of the rise of the Chinese economy for the US CA? A large part of US Trade deficit is accounted by Chinese imports In 2015 US trade balance with China was -$337 Billion! (census.gov) (more than 1/3 of the total US deficit) In 1985 the same statistic was a mere -$6 Million! In this sense, a main driver of the CA imbalance of the US is the rise of the Chinese economy 20/24

21 CA and NIIP Recall that True NIIP CA = NIIP + valuation NIIP t = NIIP 0 + valuation 1 + CA 1 + valuation 2 + CA Hypothetical NIIP without valuation change NIIP t = NIIP 0 + CA 1 + CA What about US? 21/24

22 CA and NIIP for the US A dramatic change in the US NIIP. It could be much more if the value of US owned foreign assets did not appreciate so much! Figure: The U.S. NIIP and the Hypothetical NIIP with No Valuation Changes 22/24

23 Current Account and NIIP Figure: Current Account and Valuation 23/24

24 CA and NIIP for the US Currency mismatch US assets are mostly denominated in foreign currency US liabilities are mostly denominated in dollars Dollar depreciates, which favors US NIIP Return mismatch U.S. stock market outperformed by foreign stock market Asian countries in 90s and Latin American countries in 80s experience large reversals in the international capital flows vivid debate of whether the US CA deficit is sustainable 24/24