Lecture08 balance of payments 3-5-03.pptVIP

Economics 151 International Economic Issues International Economics International Trade - flow of goods and services between countries International Finance - flow of financial assets between countries International Trade and Finance are Related Trade flows generate financial flows (trade must be financed somehow - for example, through purchases of foreign currencies) But many financial flows not directly related to trade, e.g., purchase of stocks and bonds Financial variables (e.g., exchange rates, inflation rates, interest rates) affect trade flows Increasing Economic Integration Real Sector – world trade in goods and services has grown much faster than world GDP since 1960 Financial Sector – growth in financial transactions has been even greater Balance of Payments Accounting record of all financial transactions between one country and “rest of world” Reflects country’s trade in goods, services and financial assets Reflects both private transactions (individuals and businesses) and official transactions (government) Balance of Payments A double-entry bookkeeping system Debit Entries: Transactions that generate a payment outflow (e.g., import) Credit Entries: Transactions that generate a payment inflow (e.g., export) For every credit entry there is an equal and offsetting debit entry, and vice-versa Balance of Payments Current Account Capital Account Financial Account Statistical Discrepancy Sum of credits must equal sum of debits (except for statistical discrepancy) Balance of Payments Balance of Payments deficits or surpluses Overall, must balance (except for statistical discrepancy) In any particular account, there can be a deficit or surplus, e.g., merchandise trade Merchandise Trade Balance value of merchandise exports minus value of merchandise imports Trade deficit of $450 billion in 2000 Current Account The current account is the broadest measure of a nation’s real sector trade. Includes: Exports and Imports of Goods (Merchandise) Exports and Imports