...a serious current account deficit problem. I agree with this argument. First of all current account is balance of payments which is the sum of balance of trade (exports minus imports of services or goods), factor income and transfer payments. Current account deficit problem occurs when a country spends more money than it earns. Which means expenditures are higher or more than earnings of that country. Country can spend that money either for investments or for paying its loan. If you spend that money for investments you will earn money and pay your debt but if you spend for paying your loans you will have to get more debt from other countries. Turkey has current account deficit problem because oil and energy is taken from other countries and private sector production can’t compete with foreign sector. This leads to huge gap between import and export. First of all country has to find ways to create its own energy or new sources. Secondly, government has to help or create efficient ways to help private sector to produce quality products and gain profit from those products and better conditions to compete with foreign sector products. When a country could have its worldwide brands or products that country’s export will be higher than its imports. This will automatically decreases the current account deficit because import and export will be more equal or balanced. Government can sell bond to foreign investors or domestic investors to decrease the current account deficit. Or Turkey...
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...crisis, currency derivatives, corporate risk I BOP 1. According to popular opinion, U.S. trade deficits indicate any or all of the following: a lack of U.S. competitiveness owing to low productivity or low-quality products and/or lower wages, superior technology, and unfair trade practices by foreign countries. 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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...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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...CAD ESSAY Analyse the causes and effects of Australia’s on-going current account deficit. The balance of payments is the record of all of a country’s international financial transactions in a given year and consists of the current account and the capital and financial account. The current account consists of non-reversible, external transactions and includes Balance on Goods on Services as well as Primary and Secondary Income components. Australia’s persistently high current account deficit (CAD) is contributed to by structural and cyclical factors and a sustained CAD may have both positive and negative impacts on an the Australian economy Australia’s current account has persistently been in large deficits since the mid-1980s and Australia has continued to pay out considerably large amounts of money for goods, services and other income and transfer payments. As of 2013 is balance on the current account was recorded as a deficit of $ -47.7 billion dollars. The CAD is influenced by cyclical factors, such as changes in global demand for commodities, Australia’s terms of trade and the demand for imports from Australian consumers and businesses. In the domestic economy, expansionary economic activity will contribute to a higher CAD. These are determined by the level of economic growth in Australia relative to that of major trading partners. If economic activity is high, Australian demand for imports will exceed overseas demand for Australian exports, representing a leakage...
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...1. Balance of Payments. a. The current account is having different elements which create it and these elements are * The balance of trade * Amount of payments of interest to foreign investors and from foreign investment * Payments from international tourism * Private gifts and grants. b. The capital account is composed of all capital investments made between countries, including both direct foreign investment and purchases of securities with maturities exceeding one year. 2. Inflation Effect on Trade. a. A high inflation rate tends to increase imports and decrease exports, thereby increasing the current account deficit, other things equal. b. This question is intended to encourage opinions and does not have a perfect solution. A negative current account is thought to reflect lost jobs in a country, which is unfavorable. Yet, the foreign importing reflects strong competition from foreign producers, which may keep prices (inflation) low. 5. Exchange Rate Effect on Trade Balance. If the dollar weakens against all currencies, the U.S. balance of trade deficit will likely be smaller. Some U.S. importers would have more seriously considered purchasing their goods in the U.S. if most or all currencies simultaneously strengthened against the dollar. Conversely, if some currencies weaken against the dollar, the U.S. importers may have simply shifted their importing from one foreign country to another. 9. Currency Effects. One...
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...currency, the factors that led to this depreciation and the measures government can take to stabilize the situation. Most importantly we will see if global economic uncertainty rides over all the other domestic factors to determine strength of a currency especially in developing economies. Why don’t we need a depreciating INR? The persistent decline in rupee is a cause of concern. Depreciation leads to imports becoming costlier which is a worry for India as it meets most of its oil demand via imports. Apart from oil, prices of other imported commodities like metals, gold etc will also rise pushing overall inflation higher. Even if prices of global oil and commodities decline, the Indian consumers might not benefit as depreciation will negate the impact. The depreciating rupee will add further pressure on the overall domestic inflation and since India is structurally an import intensive country, as reflected in the high and persistent current account deficits month after month, the domestic costs will rise on account of rupee depreciation. Exchange rate risk also drives away foreign investors which in turn depreciates the local currency. Indian Rupee is currently caught in this vicious cycle; it will have to find a stable level to regain investors’ confidence. The depreciating rupee has serious effects on the external debt figures of the nation. The total external debt has increased by Rs. 2186.8 billion to Rs 16384.9 billion by the end of November 2011. Factors that pushed INR...
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...2004 1. The subject of this article centers on the current account balance. Does this seem like an "international trade" or an "international money" issue? Answer: Aspects of the issue seem to overlap with both areas of international economics. The article discusses goods and services transactions [trade], as well as international borrowing and exchange rates [money]. 2. Many economists seem to be giving the issue of the current account a lot of thought. Does there seem to be a consensus in the article? Does your answer surprise you? Answers will vary. If anything, the consensus is confusion—confusion at how the deficit has persisted for so long with no severe consequences. Bergsten stands out as the most alarmed, though almost every economist seems a bit concerned about the trade deficit. This economist, on the contrary, is not concerned at all about the current account deficit, and you may come to your own conclusion upon reading further chapters. In general economists tend to agree about many big-picture issues, but may disagree occasionally where the data is open to interpretation or when more ideological considerations come into play. 3. Near the end of the article there is a logical fallacy about the current account deficit. Can you find it? Answer: The 4th to last paragraph begins with the sentence "[w]ith less and less production at home…" This sentence is fallacious because the current account does not imply that less production is taking place...
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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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...reviews the probable reasons for this depreciation of the rupee and the outlook for the same. It also reflects on the policy options to help prevent the depreciation of the Rupee I. Economics of Currency Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting the market movement. However, over a longer term currency movement is determined by following factors: Balance of Payments: It is the sum of current account and capital account of a country and is an external account of a country with other countries. Both current account and capital account play a role in determining the movement of the currency: o Current Account Surplus/Deficit: Current account surplus means exports are more than imports. In economics we assume prices to be in equilibrium and hence to balance the surplus, the currency should appreciate. Likewise for current account deficit countries, the currency should depreciate. Capital Account flows: As currency adjustments do not happen immediately to adjust current account surpluses and deficits, capital...
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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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...At the end of 1994 Mexico was hit by one of the worst economic crisis in its history, which is called "The Peso crisis" or "Tequila Crisis" and is considered one of the first ones that had global effects. After only three weeks in charge, the newly elected President Ernesto Zedillo Ponce de León was forced to lift the upper band of the exchange rate by 15%, devaluating de facto the Mexican currency. In fact, the Central Bank of Mexico had insufficient international reserves to keep the fixed exchange rate with the US dollar. This triggered panic among Mexicans, who started buying dollars because they were fearing that further and more serious devaluations would occur. This contributed to exacerbate the situation even more. The crisis was very harsh, but thanks to a US$50b rescue package from USA, the IMF, the Bank for International Settlements and private commercial banks, Mexico was able to roll over its short term dollar denominated debt and did not default on its short term securities. As it results from the following data, Mexico managed to recover very quickly: * The GDP decreased by 5.8% in 1995, but in 1996 and in 1997 it grew by 5.9% and 7.0% respectively * Household final consumption expenditure contracted by 11.5% in 1995, but in 1997 it went back again to 1994 level * Foreign direct investments decreased by 13% in 1995 and by 4% in 1996, but they grew by 40% in 1997 to a level 16% higher than in 1994 * Unemployment rate grew by almost 3 percentage...
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...IR) The literature has identified a number of channels through which monetary policy might have contributed to the build-up in financial imbalances. Most of these are thought to have worked through policy rates that were kept low for too long.8 Loose monetary policy (a low short-term rate) may have i) reduced the cost of wholesale funding for intermediaries, leading those intermediaries to build-up leverage ii) may more generally have caused banks to take more risks, including credit and liquidity risks (iii) may have increased the supply of and demand for credit (mortgages), causing asset (house) prices to rise 2. Global imbalances ( low long term IR) Rising global imbalances are associated with a greater spread of current account positions across countries and larger net flows of capital between countries. global excess of desired savings relative to desired investment—a “savings glut(과잉)”— had reduced long term rates globally, including in the United States.(significant increase of supply of saving cause a low ir), it argued that high capital inflows were an important reason of low IR from 2003- 2007 High capital inflows in turn (i) can reduce the cost of wholesale funding for domestic banks in international markets (ii) may reduce long–term interest rates (and thus compress spreads), causing financial institutions to lever up and investors to “search for yield” and (iii) may increase the total supply of credit to the domestic economy, causing local asset...
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...September 18, 2004 1. The subject of this article centers on the current account balance. Does this seem like an "international trade" or an "international money" issue? Answer: Aspects of the issue seem to overlap with both areas of international economics. The article discusses goods and services transactions [trade], as well as international borrowing and exchange rates [money]. 2. Many economists seem to be giving the issue of the current account a lot of thought. Does there seem to be a consensus in the article? Does your answer surprise you? Answers will vary. If anything, the consensus is confusion—confusion at how the deficit has persisted for so long with no severe consequences. Bergsten stands out as the most alarmed, though almost every economist seems a bit concerned about the trade deficit. This economist, on the contrary, is not concerned at all about the current account deficit, and you may come to your own conclusion upon reading further chapters. In general economists tend to agree about many big-picture issues, but may disagree occasionally where the data is open to interpretation or when more ideological considerations come into play. 3. Near the end of the article there is a logical fallacy about the current account deficit. Can you find it? Answer: The 4th to last paragraph begins with the sentence "[w]ith less and less production at home…" This sentence is fallacious because the current account does not imply that less production is taking place at home—in...
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...Free Trade Free trade may also be called International Trade. Free Trade occurs when goods and services are traded between countries without the use of import controls. For most of the late twentieth century, the prevailing wisdom has been that free trade can lead to improvements in economic welfare in the global economy. However this has not prevented regular trade disputes between countries - often when one country feels that unfair trade practices have caused the benefits from trade to become distorted. Free trade is very important to all developed countries as there are likely to be economies of scale - when producing for larger markets (foreign markets), average costs of production will be lower. There is likely to be a wider choice of products for consumers to buy and prices are likely to be lower because of lower costs. There is likely to be more efficient use of resources because countries will specialise in producing goods and services where opportunity cost is lowest, i.e. countries will produce goods and services that they can make more efficiently. There is likely to be an increased global output of goods and services without using more inputs. Another reason for importance is there is likely to be a higher standard of living for consumers. There may be political benefits because dealing with other countries will improve relationships. Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark...
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...crisis, there were strong arguments for reducing global imbalances. As a result of the crisis, there have been significant changes in saving and investment patterns across the world and imbalances have narrowed considerably. Does this mean that imbalances are a problem of the past? Hardly. The paper argues that there is an urgent need to implement policy changes to address the remaining domestic and international distortions that are a key cause of imbalances. Failure to do so could result in the world economy being stuck in “midstream,” threatening the sustainability of the recovery. JEL Classification Numbers: E21, E22, F32, F33, F36, F41 Keywords: Current account deficits, saving, investment, portfolio choice. Authors’ E-mail Addresses: oblanchard@imf.org ; gmilesiferretti@imf.org 1 One of the series of “Seoul papers” on current macro and financial issues. We are grateful to Caroline Atkinson, Nicoletta Batini, Tam Bayoumi, Christian Broda, Matthieu Bussière, Paul Cashin, Nigel Chalk, Menzie Chinn, Stijn Claessens, Charles Collyns, Carlo Cottarelli, Irineu de Carvalho Filho, Uri Dadush, Jörg Decressin, Kemal Dervis, Nicolas Eyzaguirre, Stan Fischer, Charles Kramer, John Lipsky, Enrique Mendoza, Ashok Mody, Jonathan Ostry, Jean Pisani-Ferry, Hélène Rey, David Robinson, Antonio...
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