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International Trade 4.5 Balance of Payments ISS International School Mr. Andrew McCarthy
Trade statistics ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Trade statistics ,[object Object],Red  = deficit (more imports than exports)  Blue  = surplus (more exports than imports)  Grey  = no data
Balance of Payments shows all transactions between one country and the rest of the world ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1 2 3
Balance of Payment transactions Foreign Aid Purchase of machinery  and computers Interest Chemicals, meat, raw materials  Dividends Profit Direct investment A family from Taiwan settles in NZ And brings $400,000 A backpacker visits NZ Buying shares in ANZ (Australia) A NZ borrowing funds from  overseas for expansion Sale of music copyright  to Sony UK Insurance purchased from USA Purchase airfare from Singapore Airlines A Russian firm buys 42 Below
Balance of Payments The Balance of Payments statements set out a country's transactions with the rest of the world.  The current account balance is the sum of the balances of trade in goods and services, current transfers, and investment income. More simply, the current account measures what a country saves minus what it spends or invests.  The graph shows that since 1990, New Zealand has been a net borrower. Thus, the current account deficit has reflected the amounts of other countries' savings that New Zealand has had to borrow, in order to finance spending. The last time that New Zealand was a net saver - that is, had a current account surplus - was 1973.
Balance of Payments
UK balance of payments:  2001 (£ millions)
Current account balance as % of GDP in selected countries: 1970–2003
Current account balance as % of GDP in selected countries: 1970–2003 UK
Current account balance as % of GDP in selected countries: 1970–2003 UK USA
Current account balance as % of GDP in selected countries: 1970–2003 USA Japan UK
Consequences for Japan ,[object Object],[object Object],[object Object],[object Object],[object Object]
Consequences for USA ,[object Object],[object Object],[object Object],[object Object],[object Object],The magnitude of a deficit is important. Measured as % of GDP
How do you fix a country with a large Current Account deficit? ,[object Object],[object Object],[object Object]
Links… Balance of Trade (Current Account) ( X – M ) Improves !! Value of export receipts increases Value of import payments decreases Imports become more expensive Exports become cheaper for overseas buyers  Suppose exports from USA are very elastic? A small drop in price will lead to a more than proportionate change in QD. Therefore… The increase in export receipts will be significant And Current Account will move into surplus faster.  Depreciation or weakening of  Exchange Rate
Linking J Curve and the Marshall Learner Condition… Demand for exports and imports is elastic, improvement in Current Account (good) Demand for exports and imports is inelastic,  Deficit in Current Account (bad, worsening)
Links… Balance of Trade (Current Account) ( X – M ) Improves !! And demand for exports is elastic Exchange rates Marshall Learner Condition J Curve If currency depreciates
Terms of Trade TERMS OF TRADE = X 1000 $$$ $$$
Explanation of Terms of Trade ,[object Object],[object Object],[object Object],[object Object],[object Object]
Terms of Trade Export price index: Shows change in  price of exports overtime Import price index: Shows change in  price of imports overtime TERMS OF TRADE = X 100 An increase in terms of trade is deemed…? Above 100 good A decrease in terms of trade is deemed…? Below 100 bad
Terms of Trade Export price index: Shows change in  price of exports overtime Import price index: Shows change in  price of imports overtime GOOD
Terms of Trade Export price index: Shows change in  price of exports overtime Import price index: Shows change in  price of imports overtime REALLY GOOD
Terms of Trade Export price index: Shows change in  price of exports overtime Import price index: Shows change in  price of imports overtime REALLY BAD
Exporters Appreciation = Bad Depreciation = Good NZ$1 = US$0.80 NZ$1 = US$0.70 NZ$1 = US$0.60 US$2.40 US$2.10 US$1.80 APPRECIATION DEPRECIATION NZ$3.00 NZ$3.00 NZ$3.00 Sell Buy
Importers Appreciation = Good Depreciation = Bad NZ$1 = US$0.80 NZ$1 = US$0.70 NZ$1 = US$0.60 NZ$25.00 NZ$28.50 NZ$33.30 US$20.00 US$20.00 US$20.00 APPRECIATION DEPRECIATION Buy Sell
Foreign exchange market ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],APPRECIATION DEPRECIATION
Trade statistics ,[object Object],[object Object],[object Object],[object Object]
Trade Weighted Index ,[object Object],[object Object]
Trade Weighted Index ,[object Object],[object Object],[object Object],[object Object]
Promotion of overseas trade ,[object Object]

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4.5 International Economics Balance Of Payments

  • 1. International Trade 4.5 Balance of Payments ISS International School Mr. Andrew McCarthy
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  • 5. Balance of Payment transactions Foreign Aid Purchase of machinery and computers Interest Chemicals, meat, raw materials Dividends Profit Direct investment A family from Taiwan settles in NZ And brings $400,000 A backpacker visits NZ Buying shares in ANZ (Australia) A NZ borrowing funds from overseas for expansion Sale of music copyright to Sony UK Insurance purchased from USA Purchase airfare from Singapore Airlines A Russian firm buys 42 Below
  • 6. Balance of Payments The Balance of Payments statements set out a country's transactions with the rest of the world. The current account balance is the sum of the balances of trade in goods and services, current transfers, and investment income. More simply, the current account measures what a country saves minus what it spends or invests. The graph shows that since 1990, New Zealand has been a net borrower. Thus, the current account deficit has reflected the amounts of other countries' savings that New Zealand has had to borrow, in order to finance spending. The last time that New Zealand was a net saver - that is, had a current account surplus - was 1973.
  • 8. UK balance of payments: 2001 (£ millions)
  • 9. Current account balance as % of GDP in selected countries: 1970–2003
  • 10. Current account balance as % of GDP in selected countries: 1970–2003 UK
  • 11. Current account balance as % of GDP in selected countries: 1970–2003 UK USA
  • 12. Current account balance as % of GDP in selected countries: 1970–2003 USA Japan UK
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  • 16. Links… Balance of Trade (Current Account) ( X – M ) Improves !! Value of export receipts increases Value of import payments decreases Imports become more expensive Exports become cheaper for overseas buyers Suppose exports from USA are very elastic? A small drop in price will lead to a more than proportionate change in QD. Therefore… The increase in export receipts will be significant And Current Account will move into surplus faster. Depreciation or weakening of Exchange Rate
  • 17. Linking J Curve and the Marshall Learner Condition… Demand for exports and imports is elastic, improvement in Current Account (good) Demand for exports and imports is inelastic, Deficit in Current Account (bad, worsening)
  • 18. Links… Balance of Trade (Current Account) ( X – M ) Improves !! And demand for exports is elastic Exchange rates Marshall Learner Condition J Curve If currency depreciates
  • 19. Terms of Trade TERMS OF TRADE = X 1000 $$$ $$$
  • 20.
  • 21. Terms of Trade Export price index: Shows change in price of exports overtime Import price index: Shows change in price of imports overtime TERMS OF TRADE = X 100 An increase in terms of trade is deemed…? Above 100 good A decrease in terms of trade is deemed…? Below 100 bad
  • 22. Terms of Trade Export price index: Shows change in price of exports overtime Import price index: Shows change in price of imports overtime GOOD
  • 23. Terms of Trade Export price index: Shows change in price of exports overtime Import price index: Shows change in price of imports overtime REALLY GOOD
  • 24. Terms of Trade Export price index: Shows change in price of exports overtime Import price index: Shows change in price of imports overtime REALLY BAD
  • 25. Exporters Appreciation = Bad Depreciation = Good NZ$1 = US$0.80 NZ$1 = US$0.70 NZ$1 = US$0.60 US$2.40 US$2.10 US$1.80 APPRECIATION DEPRECIATION NZ$3.00 NZ$3.00 NZ$3.00 Sell Buy
  • 26. Importers Appreciation = Good Depreciation = Bad NZ$1 = US$0.80 NZ$1 = US$0.70 NZ$1 = US$0.60 NZ$25.00 NZ$28.50 NZ$33.30 US$20.00 US$20.00 US$20.00 APPRECIATION DEPRECIATION Buy Sell
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