8.2. Balancing International Payment (BOP) International trade concerns the (X –M) component of the Aggregate Demand. It concerns the external economy.

Slides:



Advertisements
Similar presentations
Objectives Explain how ER is determined in floating ER system. Reasons causing fall in ER – depreciation Reasons causing rise in ER - appreciation.
Advertisements

Chapter 12 Economic Policy with Floating Exchange Rates
Unit: International Trade Topic: Balance of Payments and the Foreign Exchange Market.
Ch. 18: International Finance
26 THE EXCHANGE RATE AND THE BALANCE OF PAYMENTS.
Ch. 9: The Exchange Rate and the Balance of Payments.
Ch. 9: The Exchange Rate and the Balance of Payments.
Open Economy Macroeconomic Policy and Adjustment
© Pearson Education Canada, 2003 INTERNATIONAL FINANCE 34 CHAPTER.
Balance of Payment (BOP) and Foreign Exchange Rates
Ch. 10: The Exchange Rate and the Balance of Payments.
Exchange rates Currencies are bought and sold in the foreign exchange market. The price at which one currency exchanges for another in the foreign exchange.
Balance of payments Trade deficits and surpluses Foreign exchange markets.
Chapter 15 International and Balance of Payments Issues.
© 2011 Pearson Education Why has our dollar been sinking? One U.S. dollar was worth 1.17 euros in 2001 but only 68 euro cents in Why?
Foreign Exchange and Currencies Economics 71a Spring 2007 Mayo, Chapter 6 (skim) Lecture notes 2.6.
Economics 282 University of Alberta
Exchange Rates and the Open Economy Chapter 18. Foreign Exchange Market Abbreviation: FOREX Over a trillion dollars worth are traded daily. Most trading.
Economics – A Course Companion Blink & Dorton, P
International Trade and Foreign Exchange Markets
 Exchange Rates. Exchange rates  The exchange rate refers to the rate at which national currencies can be exchanged for each other in the foreign exchange.
Exchange Rate Systems  Flexible Exchange Rates  If the government simply allows their currency to vary freely (i.e. does not implement a contractionary/expansionary.
AUSTRALIA’S PLACE IN THE GLOBAL ECONOMY EXCHANGE RATES AN OVERVIEW.
Exchange Rates. Foreign Exchange Market Currencies are bought and sold on a foreign exchange market. The demand for a currency is a function of three.
External Sector Econ 102 _2015. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
38 The Balance of Payments, Exchange Rates, and Trade Deficits McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency.
International Trade. Exports v. Imports Exports – goods sold to other countries Imports - goods bought from other countries.
INTERNATIONAL FINANCE 18 CHAPTER. Objectives After studying this chapter, you will able to  Explain how international trade is financed  Describe a.
November The Balance of Payments A record of the value of all the transactions between the residents of one country with the residents of all other.
Copyright McGraw-Hill/Irwin, 2002 U.S. Export Transaction U.S. Import Transaction Balance of Payments Flexible Exchange Rates The Market for Currency.
Exchange Rate System Flexible Exchange Rate System
1 Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani Week Eleven.
© Pilot Publishing Company Ltd Chapter 12 International Finance I --- Exchange Rate.
Chapter 20Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern.
Balance of Payments Accounts Payments from foreigners Payments to foreigners Net S/P of goods & services $1,994 billion$2,523 billion-$529 billion Factor.
External Sector Econ 102 _2013. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
21 The Balance of Payments, Exchange Rates, and Trade Deficits McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Unit-5 Macro Review Foreign Exchange & Balance of Payments.
The Balance of Payments: Linking the United States to the International Economy Current account records a country’s net exports, net income on investments,
Thank You for Attention. Explain how the foreign exchange market works. Examine the forces that determine exchange rates. Consider whether it is possible.
Exchange Rates, the Balance of Payments, & Trade Deficits Chapter 21 10/5/
Balance of Payments, Exchange Rates & Trade Deficits
International Trade. Balance of Payments The Balance of Payments is a record of a country’s transactions with the rest of the world. The B of P consists.
International Trade and Foreign Exchange Markets
International Finance CHAPTER 19 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe a.
1. Definitions The balance of payments is a form of state book keeping, where monetary inflows and outflows are recorded The number of transaction depends.
Chapter 5: Foreign Exchange Markets and the Balance of Payments
Chapter 12 International Linkages Introduction National economies are becoming more closely interrelated Economic influences from abroad have effects.
Balance of Payments 4.5. Current Account The Balance of Payment is a record of all in – and outflows in a country arising from economic activity in the.
Exchange rates. Exchange Rate Systems For an economy open to international trade, the exchange rate is a crucial variable. It influences the competitiveness.
BALANCE OF PAYMENTS Chapter 3 -. Definition Is a statistical record of a country’s international transactions over a certain period of time represented.
Balance of payment. Definition of Balance of Payment Balance of Payments (BoP) statistics systematically summaries the economic transactions of an economy.
The International Monetary System: Order or Disorder? 19.
1 of 34 © 2014 Pearson Education, Inc. CHAPTER OUTLINE 20 Part 2 Open-Economy Macroeconomics: The Balance of Payments and Exchange Rates The Open Economy.
CONVERTING CURRENCIES AND ASSESSING VALUE Foreign Exchange.
International Trade 4.5 Balance of Payments ISS International School Mr. Andrew McCarthy.
External Sector Econ 102 _2013. External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
Balance of Payment ARVIND KUMAR PAREEK K.V. NO. 5 II SHIFT JAIPUR.
EXCHANGE RATE DETERMINATION
A. CreditCapital B. CreditCurrent C. DebitCapital D. DebitCurrent E. DebitFinancial.
1 Sect. 8 - The Open Economy: International Trade & Finance Module 41 - Capital Flows & the Balance of Payments What you will learn: The meaning of the.
External Sector Econ External Sector How is a country linked with other countries in the global world? 1)There are exchange of Goods and Services.
The Balance of Payments & Exchange Rates. Balance of Payments The total of all economic transactions between a nation and the rest of the world Credits-
Topic 9: aggregate demand and aggregate supply
Chapter 9 The Balance of Payments and Exchange Rates
Assignment Use the concept of the Phillips curve to examine the relationship between the price level and the unemployment level in both the short run.
Foreign Exchange & Balance of Payments
M42: The Foreign Exchange Market
The Balance of Payments, Exchange Rates, and Trade Deficits
Presentation transcript:

8.2. Balancing International Payment (BOP) International trade concerns the (X –M) component of the Aggregate Demand. It concerns the external economy. 1.Having a positive BOP is a macro objective of government. 2.To obtain a positive BOP, a country needs to export more than import. If this is not so, then the country will suffer a negative BOP or BOP deficit. 3.When we talk about the BOP, we say that there is balance of goods as well as balance of service to the BOP. 4.The balance of trade would be concern with visible goods while the balance of service would be concern with invisible goods (mostly services). 5.Together the make up the Balance of Trade and Service of the BOP. Balance of Trade (BOT) Concerns visible goods. Eg. Computers, shoes, cellphones Balance of Services (BOS) Concerns services. Eg. Banking services, consultancy services etc.

8.2. Balancing International Payment (BOP) The government monitors the Balance of Payment through 3 national accounts and they are: 1.The current account – visible, invisible, income in and out of the country due to factors of production and net transfer (like grants and donation from other governments. 2.The capital accounts – international capital transfer from of non-financial assets eg. Land factories, buildings. and machinery between its residents and the rest of the world. 3.The financial accounts – international monetary flow of funds related to investments in business, government bonds, loan stocks and company shares and foreign direct investments in factories and businesses that would yield profits.

8.2. Balancing International Payment (BOP) Exchage Rate Mechanism Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D Appreciation of Singapore Depreciation of Singapore

8.2. Balancing International Payment (BOP) Exchage Rate Mechanism Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D D1 1. Assume there is an increase in demand for Singapore Dollars owing to increase demand for Singapore exports. This will shift the DD curve to Shift to the right. 2. This causes the Singapore Dollars to appreciate from 0.85 to 0.90 USD for 1 SGD. 3. With this SGD appreciation, this means that more USD will be needed to buy a SGD dollar. (used to be 0.85 now You now need USD0.1 more to buy 1 SGD) Q1

8.2. Balancing International Payment (BOP) Exchage Rate Mechanism Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D D1 US Dollar In terms of Sing Dollar Quantity of US Dollars Money Market For US Dollars 1.20 Q S D S1 Q1 Q0 An appreciation in the Singapore Dollars would imply a depreciation in the US Dollar and vice versa.

8.2. Balancing International Payment (BOP) Exchage Rate Mechanism TEASER 1 Using exchange rate diagram(s), explain how the US exchange rate would change when there is an increase in demand for US goods by the Chinese. (US/RMB exchange is currently at USD1 = RMB6.2) Presentation: Bank of China To hand up : Charmaine, Eunice, SAQuek, Melvin, LSNing, Adi, Kim, Felicia, Dylan, Kenneth.

Exchage Rate Mechanism What Gives Rise to the Demand For A Currency 1.Changes in the current account ie. Due to imports and export trades. Where there is a demand for a country's exports, foreigners have first to buy the Singapore currency to purchase Singapore exports. 2.Inflation can cause the price of Singapore produced exports to be more expansive and Singaporean would instead buy cheaper imports. Thus we sell SGD and buy RMB to purchase Chinese exports. 3.Change in interest rate – This will attract foreign direct investment as a higher interest rate then their country would bring better returns on their deposit for these FDIs. 4.Speculation – Hot money moving in and out of a country looking for quick returns.

Exchage Rate Mechanism How the Government Can Us The Exchange Rate to Improve a Negative BOP (BOP Deficit) 1.If country is suffering a negative BOP, they can depreciate their currency ie. Sell down or give up their local currency and buy up USD causing the SGD to depreciate and in the process making the SGD depreciate. 2.This will make Singapore exports more competitive and thus we can export more thereby creating an increasingly more positive BOP through the current account.

8.2. Balancing International Payment (BOP) Depreciating a Currency Towards A Positive BOP US Dollar In terms of SGD Dollar Quantity of Sing Dollars Money Market For US Dollars 0.85 Q S D D1 SGD Dollar In terms of US Dollar Quantity of US Dollars Money Market For SGD Dollars 1.20 Q S D S1 Q1 Q0 A depreciation in the Singapore Dollars would imply an appreciation in the US Dollar. When SGD is lower against the USD, Singapore exports will become more competitive and foreigners will buy more of Singapore exports.

8.2. Balancing International Payment (BOP) The Marshal Lerner Condition 1. This condition states that a country can correct a BOP deficit by depreciating its currency on condition that the sum of its imports and exports is greater than 1. (price elastic in demand) 2. this means that there would be a net increase in demand for the country’s export thereby causing a net inflow of total revenues into the country.

8.2. Balancing International Payment (BOP) Fixed Exchage Rate Mechanism Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars No movement in Exchange Rate Q0 S D Floating Exchage Rate Mechanism Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D Advantages and Disadvantages No Limit to appreciation. No Limit to depreciation 0.85 Advantage can control exchangre rate fluctuati on making it good for trade. But government ne eds lots of reserve to do maintain fixed ex. Will allow the external economy to adjust price o f exports if its too high. However, can cause wild spectulation of currency and cause foreigners to lose confidence in the currency.

8.2. Balancing International Payment (BOP) Managed Float Exchage Rate Mechanism (Singapore) Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D Lower Bond Upper Band The MAS will intervene when the exchange rate is at the Upper or lower Band. Upper Band: When ex rate is at upper band it means that SGD is getting strong and affects our exports. To prevent deficit BOP, government will sell down the SGD so as to depreciate the SGD. Lower Band: When ex rate is at lower band it means that SGD is getting weaker and affects our import of high priced resources causing cost push inflation. To prevent this, government will buy up the SGD in the money markets so as to appreciate the SGD.

8.2. Balancing International Payment (BOP) Managed Float Exchage Rate Mechanism (Singapore) Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D Lower Band Upper Band The MAS would also do the folloiwng: 1. Steepen the slope of the band: When prices of raw materials from other countries, the MAS will steepen the slope of the band to fight imported inflation (cost push inflation)

8.2. Balancing International Payment (BOP) Managed Float Exchage Rate Mechanism (Singapore) Sing Dollar In terms of US Dollar Quantity of Sing Dollars Money Market For Singapore Dollars 0.85 Q S D Lower Band Upper Band The MAS would also do the folloiwng: 2. Widen the band: When exchange rate between SGD and its major trading partners countries are volatile, the MAS will widen the band.