2. The Balance of Payments 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

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

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

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

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

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

13. 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 balance on current account

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

15. The Balance of Payments Account  The capital account

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

17. The Balance of Payments Account  The capital account  The financial account

18. The Balance of Payments Account  The capital account  The financial account investment

19. The Balance of Payments Account  The capital account  The financial account investment ○ direct

20. The Balance of Payments Account  The capital account  The financial account investment ○ direct ○ portfolio

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

22. The Balance of Payments Account  The capital account  The financial account investment ○ direct ○ portfolio other financial flows (mainly short term)

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

24. 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

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

26. 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

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

28. 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

29. 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  Overall balance of payments  Assessing balance of payments figures

32. Exchange Rates  The rate of exchange individual rates of exchange exchange rate index

33. Sterling exchange rates: 1980–2003

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

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

39. Exchange Rates  The rate of exchange individual rates of exchange exchange rate index  Determination of exchange rates

40. Exchange Rates  The rate of exchange individual rates of exchange exchange rate index  Determination of exchange rates the equilibrium exchange rate

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

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

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

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

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

46. 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

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

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

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

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 shifts in currency demand and supply ○ differences in interest rates

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

52. 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

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

54. 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

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

56. 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

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

58. 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

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

60. 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

61. Exchange Rates and Balance of Payments  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

62. 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

63. 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

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

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

66. $ / £ Index 1990=100

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

68. 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

69. 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

70. 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

71. Debt and Developing Countries  The debt problem

72. Debt ratios: average of all developing countries

75. 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

76. 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