1. Balance of Payments and Exchange Rates

2. The Balance of Payments Account Meaning of the balance of payments The current account Meaning of the balance of payments The current account

3. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods Meaning of the balance of payments The current account –trade in goods

4. UK balance of payments: 2001 (£ millions)

5. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods –trade in services Meaning of the balance of payments The current account –trade in goods –trade in services

6. UK balance of payments: 2001 (£ millions)

7. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services

8. UK balance of payments: 2001 (£ millions)

9. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows

10. UK balance of payments: 2001 (£ millions)

11. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows –current transfers of money Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows –current transfers of money

12. UK balance of payments: 2001 (£ millions)

13. South Africa also has a section on the Current account for Net Gold Exports This is not included with goods It is a standalone section Do you know why? South Africa also has a section on the Current account for Net Gold Exports This is not included with goods It is a standalone section Do you know why?

14. The Balance of Payments Account Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows –current transfers of money –Net Gold Exports –balance on current account Meaning of the balance of payments The current account –trade in goods –trade in services –balance of trade in goods and services –income flows –current transfers of money –Net Gold Exports –balance on current account

15. UK balance of payments: 2001 (£ millions) 5. Net Gold exports 0

16. Current account balance as % of GDP in selected countries: 1970–2003

17. UK Current account balance as % of GDP in selected countries: 1970–2003

18. USA UK Current account balance as % of GDP in selected countries: 1970–2003

19. USA Japan UK Current account balance as % of GDP in selected countries: 1970–2003

20. The Balance of Payments Account The capital account

21. UK balance of payments: 2001 (£ millions)

22. The Balance of Payments Account The capital account The financial account The capital account The financial account

23. The Balance of Payments Account The capital account The financial account –investment The capital account The financial account –investment

24. The Balance of Payments Account The capital account The financial account –investment direct The capital account The financial account –investment direct

25. The Balance of Payments Account The capital account The financial account –investment direct portfolio The capital account The financial account –investment direct portfolio

26. UK balance of payments: 2001 (£ millions)

27. The Balance of Payments Account The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) The capital account The financial account –investment direct portfolio –other financial flows (mainly short term)

28. UK balance of payments: 2001 (£ millions)

29. The Balance of Payments Account The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves

30. UK balance of payments: 2001 (£ millions)

31. The Balance of Payments Account The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance

32. UK balance of payments: 2001 (£ millions)

33. The Balance of Payments Account The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance Overall balance of payments The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance Overall balance of payments

34. UK balance of payments: 2001 (£ millions)

36. The Balance of Payments Account The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance Overall balance of payments Assessing balance of payments figures The capital account The financial account –investment direct portfolio –other financial flows (mainly short term) –flows to and from reserves –financial account balance Overall balance of payments Assessing balance of payments figures

37. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index The rate of exchange –individual rates of exchange –exchange rate index

38. Sterling exchange rates: 1980–2003

42. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index The rate of exchange –individual rates of exchange –exchange rate index

43. The weights of the currencies of various countries in the sterling exchange rate index

44. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates

45. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate

46. $ price of £ Q of £ Determination of the rate of exchange

47. $ price of £ D by USA Q of £ Determination of the rate of exchange

48. $ price of £ QSQS S by UK Q of £ Determination of the rate of exchange D by USA QDQD ba

49. QSQS QDQD d $ price of £ Determination of the rate of exchange S by UK Q of £ c D by USA

50. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation

51. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply

52. Floating exchange rates: movement to a new equilibrium € / £ S1S1 D1D1 Q of £

53. € / £ S1S1 D1D1 S2S2 Q of £ Floating exchange rates: movement to a new equilibrium

54. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

55. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates

56. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

57. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates

58. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

59. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects

60. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

61. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand

62. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

63. Exchange Rates The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand speculation The rate of exchange –individual rates of exchange –exchange rate index Determination of exchange rates –the equilibrium exchange rate –appreciation and depreciation –shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand speculation

64. € / £ S1S1 D1D1 S2S2 D2D2 Q of £ Floating exchange rates: movement to a new equilibrium

65. Exchange Rates and Balance of Payments Exchange rates and the balance of payments: no government intervention –a floating exchange rate how rates are determined by dealers –automatic balancing of overall balance of payments –current, capital and financial accounts may not separately balance Exchange rates and the balance of payments: no government intervention –a floating exchange rate how rates are determined by dealers –automatic balancing of overall balance of payments –current, capital and financial accounts may not separately balance

66. Exchange rates and the balance of payments: government intervention –reducing short-term fluctuations using reserves borrowing from abroad changes in interest rates –maintaining a fixed rate of exchange over the longer term deflation / reflation supply-side policies import controls Exchange rates and the balance of payments: government intervention –reducing short-term fluctuations using reserves borrowing from abroad changes in interest rates –maintaining a fixed rate of exchange over the longer term deflation / reflation supply-side policies import controls Exchange Rates and Balance of Payments

67. Fixed versus Floating Exchange Rates Advantages of fixed exchange rates –certainty –no speculation (if rate is absolutely fixed) –prevents 'irresponsible' government policies Disadvantages of fixed exchange rates –conflicts with other macro objectives –danger of competitive deflations –problems of international liquidity –difficulties in adjusting to shocks –speculation Advantages of fixed exchange rates –certainty –no speculation (if rate is absolutely fixed) –prevents 'irresponsible' government policies Disadvantages of fixed exchange rates –conflicts with other macro objectives –danger of competitive deflations –problems of international liquidity –difficulties in adjusting to shocks –speculation

68. Fixed versus Floating Exchange Rates Advantages of free-floating rates –automatic correction –no problem of international liquidity –insulation from external events –less constraint on domestic macro policy Disadvantages of free-floating rates –possibly unstable exchange rates –speculation –uncertainty for business but use of forward markets –lack of discipline on economy Advantages of free-floating rates –automatic correction –no problem of international liquidity –insulation from external events –less constraint on domestic macro policy Disadvantages of free-floating rates –possibly unstable exchange rates –speculation –uncertainty for business but use of forward markets –lack of discipline on economy

69. $ / £ $ / £ exchange rate and £ exchange rate index: 1976-2003

70. $ / £ $ / £ exchange rate and £ exchange rate index: 1976-2003

71. $ / £ Index 1990=100

72. $ / £ exchange rate and £ exchange rate index: 1976-2003 $ / £ Index 1990=100

73. The Origins of the Euro Post-war regulation of exchange rates –the Bretton Woods system –its collapse in the early 1970s –dirty floating The ERM –features of the ERM –the 1980s –crisis in the ERM events of 1992 events of 1993 –a return of calm Post-war regulation of exchange rates –the Bretton Woods system –its collapse in the early 1970s –dirty floating The ERM –features of the ERM –the 1980s –crisis in the ERM events of 1992 events of 1993 –a return of calm

74. The Origins of the Euro The Maastricht Treaty –the timetable for EMU –the convergence criteria inflation interest rates budget deficits general government debt exchange rates Birth of the euro –meeting the convergence criteria –role of the European Central Bank (ECB) The Maastricht Treaty –the timetable for EMU –the convergence criteria inflation interest rates budget deficits general government debt exchange rates Birth of the euro –meeting the convergence criteria –role of the European Central Bank (ECB)

75. European Economic and Monetary Union How desirable is EMU? –Advantages of a single currency eliminating conversion costs increased competition and efficiency elimination of exchange-rate uncertainty increased inward investment lower inflation and interest rates –Disadvantages of EMU political arguments adjustment to shocks –problem of asymmetric shocks EU12 may not be an optimal currency area regional problems How desirable is EMU? –Advantages of a single currency eliminating conversion costs increased competition and efficiency elimination of exchange-rate uncertainty increased inward investment lower inflation and interest rates –Disadvantages of EMU political arguments adjustment to shocks –problem of asymmetric shocks EU12 may not be an optimal currency area regional problems

76. Fluctuations between the euro and the dollar

77. US interest rate

78. Fluctuations between the euro and the dollar US interest rate ECB interest rate

79. Fluctuations between the euro and the dollar $ / € US interest rate ECB interest rate $ / €

80. Globalisation and the Problem of Instability Interdependence through trade –international effects of changes in aggregate demand –vulnerability of open economies Financial interdependence –size of international financial flows –international effects of changes in interest rates Interdependence through trade –international effects of changes in aggregate demand –vulnerability of open economies Financial interdependence –size of international financial flows –international effects of changes in interest rates

81. Globalisation and the Problem of Instability The need for policy co-ordination –the search for policy co-ordination G7/G8 meetings: attempts at harmonisation but lack of convergence Difficulties in achieving harmonisation –differences in budget deficits and debt –interest rate divergence –different internal structures of economies –politicians more concerned with domestic issues The need for policy co-ordination –the search for policy co-ordination G7/G8 meetings: attempts at harmonisation but lack of convergence Difficulties in achieving harmonisation –differences in budget deficits and debt –interest rate divergence –different internal structures of economies –politicians more concerned with domestic issues

82. Debt and Developing Countries The debt problem

83. Debt ratios: average of all developing countries

86. Debt and Developing Countries Origins of the debt problem –borrowing to finance development –the 1973/4 oil shock –the 1979/80 oil shock world recession  fall in export earnings fall in commodity prices (exports) high interest rates  cost  of servicing debt Rescheduling debt –rescheduling official loans –rescheduling commercial bank loans Origins of the debt problem –borrowing to finance development –the 1973/4 oil shock –the 1979/80 oil shock world recession  fall in export earnings fall in commodity prices (exports) high interest rates  cost  of servicing debt Rescheduling debt –rescheduling official loans –rescheduling commercial bank loans

87. Debt and Developing Countries Dealing with debt –structural reforms –IMF structural adjustment programmes tight fiscal policies to reduce budget deficits privatisation and market liberalisation open trade policy hardship from IMF programmes –debt forgiveness HIPC initiative –successes / failures to date pressure to cancel debts Dealing with debt –structural reforms –IMF structural adjustment programmes tight fiscal policies to reduce budget deficits privatisation and market liberalisation open trade policy hardship from IMF programmes –debt forgiveness HIPC initiative –successes / failures to date pressure to cancel debts