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VIII. Balance of Payments

VIII. Balance of Payments

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Published by: Bence Czufor on Dec 28, 2011
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11/16/2015

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Lectures in Basics of Finance

The informative role of the Balance of Payments

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Balance of Payments A given set of accounts of all the transactions between residents and non-residents of an eligible economy. 2 . and refer to a period of one year. Figures are expressed in a key currency.

Portfolio investments g. Current Account Balance a. Short-term loans i.2. SDR 200X inflow outflow balance 3 .The scheme: I.and long term loans h. Goods b. inc. Reserve assets k. Errors and omissions II. Capital Account Balance II.1. Mid. Financial Account Balance e. Interest and dividend incomes d. Monetary gold l. Direct investments f. Foreign reserves. Other investments j. Services c. Current transfers II.

The sub-equilibriums within the BoP  Foreign trade (export-import) equilibrium  Current account equilibrium  Fundamental equilibrium (current account plus normal capital flows)  Balance of Payment equilibrium (without the reserve assets) 4 .

5 . if some transactions need permission or notification to some authority. if all of the BoP items can be freely converted. and restricted. if it’s convertibility is at least fulfilled by the Current Account transactions.Convertibility The ability to freely use a currency for international transactions by the residents of any country. According to the IMF classification. Complete. an eligible foreign currency is convertible.

pound sterling. dollar are classified as freely usable currencies. and U. the euro. At present.Freely Usable Currency A currency that the IMF has determined is widely used to make payments for international transactions and widely traded in the principal exchange markets. Japanese yen.S. 6 .

the dollar is falling with new speed – creating a host of challenges not just for the U.S. just two days after it surged through the symbolically important level of $1. labour market and deeping turmoil in housing. one euro fetched more than $1. U. the culmination of a six-year slide in which the dollar has shed more than 40% of its value versus the European currency and more than 20% of its value against a broader basket of currencies. (…) 7 .S. Late in New York. together with data showing that in 2007 economic growth slowed to its lowest pace in 5 years. The latest impetus: economic data in the past 3 days showing a softening U.S. but for everyone from sugar traders in Brazil to central bankers in the Persian Gulf. the dollar sank to a record low against the euro. emphasizing gloomy prospects for the economy while pointing to the week dollar as a rare bright spot helping exports. 2008 Beaten down by fears of a U.52.50.S. recession.Even as it falls. March 2. jobs and the trade deficit. On Thursday. dollar retains place in world The Wall Street Journal.. federal Reserve Chairman Ben Bernanke put even more pressure on the dollar during testimony before Congress on Thursday.

But if it does. according to the BIS.It is far from certain that the dollar will continue to decline. even though only 27% go to the U. More than 80% of exports from Indonesia. trillion of daily currency transactions around the world. While that is down from 90% in 2001.(…) In trade.S. despite wide-spread fears of mass exodus from the currency. according to the latest figures available in research by the ECB. businesses and policy makers around the world could well be wrestling with the problems created by their dependence on the currency for many years to come. Almost 100% of Algeria’s exports are invoiced in dollars. For countries heavily reliant on commodity exports such as oil. 8 . even though less than a quarter of their exports go to the U. the figures are higher still. Nearly two-thirds of the world’s central bank reserves remain denominated in dollars.S. the dollar is also deeply entrenched. (…) The dollar is involved in 86% of the $3. Businesses lower their transaction costs by dealing in a common currency. often as a middle step in exchanges between two other currencies. Thailand and Pakistan are invoiced in dollars. no other currency comes close.2.

there are benefits and drawbacks to having a dominant currency that is also declining in value. though officially supporting a strong dollar. which can trim the nation’s trade deficit. 9 . faster than the 7% growth rate of the 1990s – a difference worth more than $17 billion a year if it continues. who often choose to hold prices in dollars steady rather than lose sales. forcing many company into bankruptcy. can borrow anywhere in the world in its own currency. a factor that complicates the Federal Reserve’s tasks of fighting inflation. A weak dollar helps U. U.S. the local-currency value of their debts soared. exports of goods and services have grown on average by 8% annually during the past four years.S.S. A weak dollar also puts some upward pressure on the prices of imports.S. They borrowed in other currencies – mostly dollars – and when their own currencies collapsed against the dollar. But foreign exporters. Because the U. hasn’t protested its mostly gradual decline.S.S. it isn’t facing the kind of dilemma countries like South Korea and Indonesia faced in the 1990s. Thus the Treasury Department.For the U.. exports by making U. goods less expensive overseas. often bear some of the burden of the currency’s decline and diminish its inflationary impact in the U.

that the credit crisis would damage the dollar’s role in the global economy: „It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. a reworking of a global financial system built around the dollar. These benchmarks are all denominated in dollars. at a meeting of the Organisation of Petroleum Exporting Countries. (…) Last November. the Saudi foreign minister. Iran’s foreign minister urged the group to publicly express concern at the weakness of the dollar. if it is to come at all. warned it was a „sensitive issue” that could „cause the dollar to drop further.” If history is any guide. Oil prices are based around three types of crude oil: West Texas Intermediate. the famed currency speculator. Soros. would take years and a massive change in the economic landscape. Switzerland.” The idea was quashed by Saudi Arabia. but it spurred speculation that the OPEC was exploring alternative to pricing in dollars. Oil experts say such a change would be hard to pull off. Prince Saud al-Faisal.Mr. Brent Crude and Dubai Crude. 10 . Responding to Iran’s proposal. suggested in January at the World Economic Forum in Davos.

S. 11 . Because major U.. it would weaken the dollar’s value. If they keep the dollars. according to data from the IMF.S. The dollar’s share of global central-bank reserves hit a peak of 72% in early 2002. It declined by 6 percentage points that year and the next. a build-up of unwanted assets would only mount. If they sell the dollar reserves. which tie their currencies closely to the dollar and accumulate dollars to manage their exchange rate. Central banks face a dilemma if they want to change that relationship.The dollar is still deeply entrenched as a reserve currency for central banks. That could have two effects: It would potentially hurt their own trade competitiveness and push down the value of the remaining dollar reserves. but has remained relatively stable since. trade deficit shrinks dramatically.S. The IMF figures exclude the reserves of China and several Persian Gulf nations. So the actual percentage of global dollar reserves is likely higher. trading partners export so much to the U. there is a constant flow of dollars into their central bank coffers that can’t be changed unless the U.

Questions for the case study  How is changing the U.S. dollar’s course?  What is the evidence for the dependence of world markets on the US dollar?  In contrary to its worldwide effects. what is the influence of the weakening dollar on the domestic market agents?  Can any key reserve currency take place the functions of the dollar? 12 .

Compulsory reading:  Lloyd B. Thomas: Money. banking and financial markets. 183-198. Chapter 8 (pp.) 13 .

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