TÀI CHÍNH QUỐC TẾ 7 BP

VII Balance of Payment-BP Money is just something to make bookkeeping convenient H.L.Hunt Outline Concept of Balance of Payment An Overview of the Sub-Accounts in Balance of Payments Principles of Balance of Payments Accounting Balance of Payment Deficit or Surplus Elasticity and Absorption Approaches Some Open Economy Indentities TS Nguyễn Phúc Hiền - ðại học Ngoại thương 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 TS Nguyễn Phúc Hiền - ðại học Ngoại thương Concept Key definition need to be resovled at the outset 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 TS Nguyễn Phúc Hiền - ðại học Ngoại thương Concept The Criterion for a transaction to be included in 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 A transaction between domestic residents and domestic residents or foreign resident and foreign resident are excluded in the BP Currency using accounting in the BP: • • • Home currency (developed countries) USD or Euro (developing countries) SDR (IMF) TS Nguyễn Phúc Hiền - ðại học Ngoại thương An Overview of the Sub-Accounts in Balance of Payments a b c d e Current account balance-AC Capital balance Net error omission – OM Overall balance – OB Official financing balance-OFB TS Nguyễn Phúc Hiền - ðại học Ngoại thương a Current account Reflecting transfer of ownership between domestic residents and foreign residents Included: • Trade balance – Balance on goods (visible) such as rice, coffee, textile, automobile, machinary • Service balance (invisible) Logistics, tourism, banking, finance, insurance, constructing and others • Income balance (invisible) Recepts and payments of interest, dividends and profits are reported TS Nguyễn Phúc Hiền - ðại học Ngoại thương • Unilateral transfers (invisible) 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 AC = TB + SB + IB + Un = VB + InVS TS Nguyễn Phúc Hiền - ðại học Ngoại thương Current account balance Current account balance (percent of GDP at current market price) 13 11 -1 1990 -3 1992 1994 1996 1998 2000 2002 2004 2006 2008 -5 -7 -9 -11 -13 Vietnam China Thailand TS Nguyễn Phúc Hiền - ðại học Ngoại thương South Korea Trade balance Trade balance (percent of GDP at current market price) 13 11 -1 1990 -3 -5 -7 -9 -11 -13 -15 1992 1994 1996 Vietnam 1998 China 2000 2002 Thailand TS Nguyễn Phúc Hiền - ðại học Ngoại thương 2004 2006 South Korea 2008 Source: ADB 10 Balance of Payment Deficit or Surplus • Note: Balance of payment deficit or surplus refered to a deficit or surplus of sub-account of the balance of payment why? TS Nguyễn Phúc Hiền - ðại học Ngoại thương 28 Balance of Payment Deficit or Surplus Current account‘s surplus or deficit • • • Impact strongly on macroeconomic indicators such as exchange rate, growth and inflation and vice versa Surplus current account CA > is creditor If BB ≥ no risk If BB < risk Deficit current account CA < is debtor If BB ≥ risk If BB < very risk Current account balance: CA = TS Nguyễn Phúc Hiền - ðại học Ngoại thương 29 Balance of Payment Deficit or Surplus Trade surplus or deficit • • • Trade surplus: X>M Trade deficit: X< M Trade balance: X=M Is a major part of the current account Represent direction of the current account Impact strongly on exchange rate and vice versa TS Nguyễn Phúc Hiền - ðại học Ngoại thương 30 Current Account and trade balance, Vietnam percent of GDP at current market price 13 11 -1 1990 -3 -5 -7 -9 -11 -13 -15 1992 1994 1996 1998 2000 current account 2002 2004 2006 2008 trade balance TS Nguyễn Phúc Hiền - ðại học Ngoại thương 31 Balance of Payment Deficit or Surplus Overall balance surplus or deficit • Deficit of overall balance is financed by official setlement account: - Reduced foreign reserves Borrowing from other central banks and IMF Relevant to country where applied fixed or managed float exchange rate Not relevant to country where applied flexible exchange rate TS Nguyễn Phúc Hiền - ðại học Ngoại thương 32 Elasticity and Absorption Approaches (1) Elasticity Approach (Marshall-Lerner) 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 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 33 Elasticity Approach • e The price elasticity of demand for exports is ( x) defined as the percentage of change in exports over the percentage change in price as represented by percentage change in exchange rate dx / X ex = ds / S • e The price elasticity of demand for imports is ( m ) defined as the percentage of change in imports over the percentage change in price as represented by percentage change in exchange rate dm / M em = ds / S • Marshall-Lerner condition ex + em > TS Nguyễn Phúc Hiền - ðại học Ngoại thương 34 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) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 35 J-curve effect • • • • • Assuming export prices in domestic currency are constant In case of depreciation of the domestic currency, exports become c.p cheaper in terms of foreign currency In the short term quantities 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 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 36 J-curve effect Trade balance change After devaluation TS Nguyễn Phúc Hiền - ðại học Ngoại thương After revaluation 37 Pass-Through Analysis Concept • The pass through analysis measures the extent to which exchange rate changes are transmitted on the import prices in foreign currency • The pass through can be measured econometrically and differs from country to country Different Degrees of Pass-Through • With full pass through, the price change of the imported good (in domestic currency) equals the exchange rate change (producer currency pricing) • No pass-through, the import prices in domestic currency will stay constant (pricing to market) • Partial pass-through the import prices in domestic currency change less than exchange rate‘s change TS Nguyễn Phúc Hiền - ðại học Ngoại thương 38 (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) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 39 (2) Absorbtion Approach 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) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 40 (2) Absorbtion Approach 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 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 41 Some Open Economy Identies Y= C+I+G+(Ex-Im) Ex-Im= Y-(C+I+G) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 42 ... domestic residents or foreign resident and foreign resident are excluded in the BP Currency using accounting in the BP: • • • Home currency (developed countries) USD or Euro (developing countries)... Phúc Hiền - ðại học Ngoại thương Concept The Criterion for a transaction to be included in the BP is that it must involve a transaction between a resident of the reporting country and a resident... Economy Indentities TS Nguyễn Phúc Hiền - ðại học Ngoại thương Concept • • • • Balance of Payment (BP) is a statistical record of all economic transactions between residents of the reporting country