...1.Read the article Asset Price Booms and Current Account Deficits. Explain the basic premise of the article and describe the impact of the real estate and financial asset prices on the U.S. current account deficit. The U.S. stock market experienced pronounced growth preceding the crisis which hit its peak in 2008. This growth coincided with reduced rates of savings (even a negative savings rate at times) as assets were valued highly and used as collateral for additional debt taken on by consumers to purchase additional goods. Those private investors leveraged heavily in the market and feeling perhaps ‘overly’ confident because of the impressive growth and also the rising value of their real estate, were especially vulnerable when the recession hit. Institutional investors such as Fannie Mae and Freddie Mac were induced by the government to issue loans to lesser qualified applicants. This created a massive asset price bubble which culminated in the economic crisis. This recession coincided with jobs losses, sharp declines in real estate values to the point where mortgages went ‘underwater’ (meaning that the value of the real estate was to a certain extent less than remaining amount owed for the property), and a sharp contraction on Wall Street. Paul Bergin, UC-Davis professor and visiting scholar in the Economic Research Department of the Federal Reserve Bank of San Francisco, states that “Rising asset values in the United States permitted households to borrow more easily...
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...usually a year. It represents a summation of country's current demand and supply of the claims on foreign currencies and of foreign claims on its currency. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. Current account:The difference between a nation’s savings and its investment. The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade, net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. The current account and the capital account are the two main components of a nation’s balance of payments. Capital account:In macroeconomics and international finance, the capital account is one of two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets. A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the...
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...| US & the pertaining issue of Current Account Deficit: As mentioned in the given case, “A country with good investment prospects, a large budget deficit, or a low propensity to save tends to have a net capital inflow and a current account deficit”. The onus is on: a) Encouraging consumer spending by giving tax cuts and low interest rates. b) Providing good investment prospects to foreign customers as most of the big-shot investors find American securities less risky as compared to EU or other emerging markets. c) Consistent decline in competitiveness as the country is vastly dependent on importing goods rather than developing providing a boom to economies like India and China. * Ever since early 90s, the US has always imported more than they export. Thus which on the other hand has led to a need for cheaper imports from other countries to sustain an average American household. Since cheap labor is available in foreign countries most of the work is outsourced and hence their production is not up to their full potential. * The government on the other hand focuses on imports rather than improve the supply leading to a poor manufacturing sector.This is an advantage to countries like China which have cheap labor and is a major exporter to the U.S. Also as the government focuses on imports rather than supply to meet the demand major exporters like China get benefited. * The...
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...The current-account balance is a report that covers a certain period; regularly a year, which indicates the difference between the inflow and outflow of money into and out of a country from the trade in goods and services, investment, saving, and income and cash transfers. When a country’s current account balance is positive (running a surplus), the country is a net lender to the rest of the world. When a country’s current account balance is negative (running a deficit), the country is a net borrower from the rest of the world. Therefore, the current-account balance is a way to determine its economic activity and can strongly reflect a country’s overall economic position. Ideally speaking, the current account balance should be zero, in the real world however this is highly improbable. The formula used for calculating the current account balance is CAB = X-M+NY+NCT. Where X = Exports of goods and services, M = Imports of goods and services, NY = Net income abroad and NCT = Net current transfers. It is important to understand from where a deficit or a surplus is stemming because sometimes looking at the current account as a whole could be misleading. In the United States, for example, current account deficit has been increasing steadily for several years now. Among the factors that have created a current account deficit, four of these are described as follows: 1) Consumer spending had been on the rise in the United States, motivated in great part to a growing real estate...
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...that American trade deficit will not be restored and the country’s practice of borrowing from abroad to pay for the current goods and services will not stop. The USA borrows from abroad to finance its trade deficit, on top of that the USA government spends more money than it takes from taxes. The budget deficit increases the gap between country’s national savings and national income and and also widens the deficit in the current account by necessitating the country to borrow more money from other foreign countries. This widened current deficit puts strain on the USA currency in the financial markets. If Americans are going to buy inexpensive imported goods and the USA government has a budget shortage, I think Warren Buffett is making a fantastic move by betting against the dollar. Between 2002 and 2007 the dollar has fallen by 40 percent. 2. Why has the United States developed such large current account deficits? I and a lot of people believe the United States has developed such a large current account deficit is the trade deficit. The USA is importing more goods and services more than it exports so it has held trade deficit since the late 1960s and this trade deficit has been mushrooming at an unbelievable rate since 1997. The increasing oil prices in the last few years has helped increased the current account deficit too. Another reason for the current account deficit could be attributed to the budget deficit. In almost every year the government cuts taxes and increases...
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...countries. BOP is based on double-entry bookkeeping. Every transaction is recorded twice, once as a debit and once as a credit. According to accounting convention, a source of funds (either a decrease in assets or an increase in liabilities) is a credit and a use of funds (either an increase in assets or a decrease in liabilities) is a debit. Inflows are reported with a positive sign and are listed as a credit. Outflows are reported with a negative sign and are reported as a debit. Three major BOP categories: – Current Account: records flows of goods, services, and transfers. – Capital Account: shows public and private investment and lending activities. – Official Reserves Account: measures changes in holdings of gold and foreign currencies by official monetary institutions. By definition, the overall BOP must balance. (Current account balance) + (Capital account balance) ( (Official reserves account) = BOP = 0 BOP is related to the foreign exchange market. All transactions that affect the inflows and outflows of foreign currency are recorded in the BOP. Exhibit 2.1 Balance of Payments Categories |Credits (+) |Debits (-) | | | | |a. Exports of goods |b...
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...coming in, and vice versa. Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners. COMPARATIVE ANALYSIS OF BALANCE OF INDIAN PERSPECTIVE Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. The balance of payments of a country is a systematic record of all transactions between the residents of a country and the rest of the...
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...| | | SCHOOL OF BUSINES Project on: Balance of Payments Prepared By: Hassan ajami, Mansour daher, reda younes,ali Mohsen, Mohammad kanso Submitted To: Dr. habib awada Course BFIN 430 (International Banking & Finance). Spring 2013-2014 TABLE OF CONTENTS 1- INTRODUCING THE BOP CONCEPT: 1.1) Brief History 5 1.2) Basic Definition 5 1.3) System of Recording 7 1.3.1) Identifying Transactions 7 1.3.2) The Debit & Credit System 9 2- GENERAL STRUCTURE OF THE BOP: 2.1) Main Components 12 2.1.1) Current Account 12 2.1.2) Trade Balance 15 2.1.3) Capital Account 16 2.1.4) Financial Account 18 2.1.5) Errors & Omissions 22 2.2) Complications 23 2.2.1) Accounts Interrelation 23 2.2.2) Deficit & Surplus Dilemmas 25 3- BOP FROM EQUILIBRIUM TO DISEQUILIBRIUM 3.1) BOP in Equilibrium 27 3.1.1) Equilibrium Conditions 27 3.1.2) Equilibrium Model 27 3.1.3) Types of Equilibrium 29 3.2) BOP in Disequilibrium 29 3.2.1) Causes of Disequilibrium 29 3.2.2) Types of Disequilibrium 32 3.2.3) Consequences of Disequilibrium 33 3.2.4) Measures to Eliminate Disequilibrium 33 3.2.5) Demonstrating Disequilibrium 35 4- STUDYING THE LEBANESE BOP 4.1) Historical Events: 1999 and before 37 4.2) Major Events of the Decade: 2000-2008 38 4.3) Recent Events: 2009-2010 40 5- CONCLUSION Importance of BOP 44 1- INTRODUCING...
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...its Current Account Deficit America's current account deficit has been fluctuating over the past 20 years. From 1991 it rose to a record high of about 6% of GDP in 2006 and it began to fall a year later to finally reach a level of 3% of GDP in 20091. Capital inflows finance the current account deficit. Economists are wondering if such large inflows are sustainable. According to economic theory, a current account deficit is not necessarily harmful as it stimulates a period of inward investment that can actually boost a country’s employment and investments. The current account deficit is still considered too large even at 3% and there is fear that it is caused by the recession. However economists believe that the US current account deficit may actually contribute to its development and attract foreign investors. The current account deficit is actually a good arsenal for the development of a country. For example, Japan invested a lot in the UK and this caused the emergence of new jobs in addition to the increased investment. The following paragraphs will enlighten more about how the current account of the US can affect its economy. 1 Feenstra, Robert C., and Alan M. Taylor. "National and International Account." International Macroeconomics. New York: Worth, 2012. 172-77. Print. A current account deficit (CAD) occurs when a country has an excess of one or more of the four factors (goods, services, income and unilateral transfers) making up the account. When ...
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...On Our Way to Inclusive Growth By Cesar B. Bautista Philippine Daily Inquirer 3:53 am | Monday, March 4th, 2013 http://philippinedailyinquirer.newspaperdirect.com/epaper/viewer.aspx The Philippines has achieved considerable progress in tackling corruption and upgrading competitiveness, which makes it earn the respect of world economists, thanks to the high confidence enjoyed by President Aquino. From the “Sick Man of Asia” in the past, the country is now considered as the possible “Tiger Economy” before long. The President has stated that in the second half of his term, the government will focus on providing opportunities for the creation of quality employment and livelihood, since these are the country’s pathway out of poverty. Building on the substantial improvements so far reached by the Cabinet economic cluster, the various business organizations have reiterated the need for sectoral economic planning of products and services, which have the potentials to be globally competitive and where the country can benefit from the global economies of scale that will meet the challenging targets of generating 14.6 million employment and livelihood until 2016. The Philippines will become a global player in a broad field of products and services, which will benefit its resources (both human and natural), financially, technologically, socially and culturally. It will provide the seed of economic renaissance, which was proposed by the combined local and joint foreign business chambers...
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...Which of these factors is likely to underlie the persistent U.S. trade deficits. Comment/Explain. Although popular opinion believes these factors are likely to underlie the trade deficits, none of these factors underlie the persistent U.S. trade deficits. These factors affect other countries more than the U.S. however run trade surplus. American trade deficits reflect the U.S. savings deficit. 2. Identify the correct BOP account for each of the following transactions. a. A German-based pension fund buys U.S. government 30-year bonds for its investment portfolio. Financial account: portfolio investment liabilities b. Scandinavian Airlines System (SAS) buys jet fuel at Newark Airport for its flight to Copenhagen. Current account: Goods: Exports FOB c. Hong Kong students pay tuition to the University of California, Berkeley. Current account: Services: credit d. The U.S. Air Force buys food in South Korea to supply its air crews. Current account: Goods: Imports e. A Japanese auto company pays the salaries of its...
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...1. What is the investment income account of the balance of payments? Investment income account includes: a. Direct foreign investment (Investment in fixed assets in foreign countries that can be used to conduct business operations to earn revenue.) b. Portfolio investment (Investment in long-term financial assets like stocks and bonds to earn dividends or interests between countries that do not affect the transfer of control.) c. Other capital investment (Investment in short-term financial assets like money market securities between countries to earn interests.) 2. What is the official settlements account of the balance of payments? How are official settlements deficits and surpluses associated with movements in the international reserves of the balance of payments? Official settlement account is the sum of the current account, the capital account, the non-reserve financial account, and the statistical discrepancy. Official settlements offset international reserves. Official settlements surplus increase official reserve assets. Official settlements deficits decrease official reserve assets. 3. Explain why private national saving plus government saving equals the current account of the balance of payments. a. National income on expenditure = C+I+G+X-M b. National income on disposal = C+S+T c. Because expenditure = disposal, therefore C+I+G+X-M=C+S+T d. We can see X-M=(S-I)+(T-G) e. So Current asset equals to private national saving...
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...country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. DIVISION OF BALANCE OF PAYMENTS The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction. The Current Account The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for...
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...Chapter 03 Balance of Payments True / False Questions 1. Over half of all dollar bills in circulation are held outside American's borders. True False Multiple Choice Questions 2. The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include A. consumption and investment and government expenditure. B. consumption and government expenditure and net exports. C. consumption and net exports and government expenditure. D. consumption less imports. 3. If the United States imports more than it exports, then this means that A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. B. the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus. C. the U.S. dollar would be under pressure to appreciate against other currencies. D. both b) and c) are correct 4. Balance of payments A. is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping. B. provides detailed information concerning the demand and supply of a country's currency. C. can be used to evaluate the performance of a country in international economic competition. D. all of the above 5. If a country is grappling with a major balance-of-payment difficulty, it may not be...
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...INTERNATIONAL FINANCIAL MANAGEMENT ASSIGNMENT ON BALANCE OF PAYMENTS ) INDEX S No | Particular | Page | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | WHAT IS BALANCE OF PAYMENT? The balance-of-payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others. For example, if INDIANS buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding RUPEES, which they may hold in the form of bank deposits in INDIA or in some other INDIAN investment. The payments Indians make to Japan for automobiles are balanced by the payments Japanese make to Indians. individuals and institutions, including banks, for the acquisition of Rupee assets. Put another way, Japan sold India automobiles, and INDIA sold Japan rupees or Rupee-denominated assets such as treasury bills . Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of...
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