COURSE: 

INTERNATIONAL FINANCE 
(INE 3001 E) 

FINAL ASSIGNMENT

Instructor : Dr. Tran Viet Dung

Name of student : Nguyen Thi Hai Yen
Date of birth : 08/08/2000
Student ID : 18050635

Hanoi, 2021
Course: International Finance
(INE 3001 E) 
 
 

Student 
Nguyen Thi Hai Yen (Student ID: 18050635) 

 
 
Word count 
3373 words (Excluding Title Page, Table of Contents and References) 
 

 
Module coordinator 
Dr. Tran Viet Dung
 

Date of submission: 
06/04/2021
 
 
Plagiarism statement 
“I confirm that this assignment is entirely my own work and has not been submitted in
full or in part for any other course within or outside UEB. I confirm that all references are
duly acknowledged.” 
 
 
 
 
 
Signature: ….  

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 End-of-Semester Assignment
Problem 1 (6 points): The following table shows Vietnam’s balance of
payments in 2009, when the economy was seriously affected by the global
economic recession.
Table 1: Vietnam’s International Transactions, 2009 (Unit: billions U.S. dollars)

B. Capital and financial

A. Current account account balance
balance
Trade in goods Direct investment (net) 6.9
Foreign investment in Vietnam,
Exports, f.o.b. 57.1 liabilities 7.6
Imports, f.o.b. -64.7 Vietnam's investment abroad, assets -0.7
Trade in services Portfolio investment (net) -0.1
Exports 5.8 Medium - and long-term loans 4.5
Imports -8.2 Disbursements 6.1
Investment incomes ODA loans 6.9
Receipts 0.8 Commercial loans -0.8
Payments -3.8 Debt payments -1.7
Unilateral transfers Short-term capital (net) -4.5
Private (net) 6 C. Errors and omissions -9
Official (net) 0.4 D. Balance of Payments
E. Changes in international reserves
Source: IMF Staff Report

a. Calculate Vietnam’s current account balance, financial and capital

account balance, the official settlement balance (or the balance of
payment in short), and the changes in the official reserve assets.
Explain your calculations.
b. Based on the economic situation in 2009, discuss the disequilibrium
(surplus or deficits) in the current account balance, financial account
balance, and the balance of payment. (maximum 500 words)
c. How did the State Bank of Vietnam (SBV) respond to this situation
through exchange rate policy and foreign exchange market
intervention? Show that the SBV actually moved to a more flexible
exchange rate policy during this period. (maximum 500 words)
d. Using the DD-AA model, show that the adoption of a more flexible
exchange rate policy assisted the economy in mitigating the adverse
effects of global economic recession.
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 Key

a. Calculate Vietnam’s current account balance, financial and capital

account balance, the official settlement balance (or the balance of
payment in short), and the changes in the official reserve assets.
Explain your calculations.
According to above table, we have Vietnam’s balance of payments in 2009, and to
calculate Vietnam’s current account in this year, we rely on the following equation:
CA = (EX-IM) + NI + NT
Where:
- EX is the export of goods
- IM is the import of goods
- NI is the net income
- NT is the net current transfer

The current account is a country's trade balance plus net income and current transfer.
The trade balance is a country's imports and exports of goods and services. 
- The balance of goods and services: (57.1 – 64.7) + (5.8 – 8.2 ) = -10
- The net income - NI = Income receipts – Income payments = 0.8 – 3.8 = -3
- The net transfer – NT = 6 + 0.4 = 6.4
 Vietnam’s current account balance in 2009 = (-10) – 3 + 6.4 = US -6.6 billion
(deficit)

The capital and financial accounts measure net flows of financial claims. This is
calculated as the sum of net foreign direct investment, net portfolio investment, medium-
and long-term loans and net short-term capital.
The financial and capital account of Vietnam in 2009 equals 6.9 + (0.1)+ 4.5 + (-4.5) =
US $6.8 billion.

The formula of Balance of payment equals current account balance plus financial and
capital account balance plus errors and omissions (if have). With the results above, the
balance of payments in Vietnam 2009 is calculated:
BOP = -6.6 + 6.8 + (-9) = -8.8 (deficit)
We have OSB = - ORA => ORA = - OSB = - (-8.8) = 8.8 billion USD.

So Vietnam’s the changes in the official reserve assets = 8.8 billion USD.

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 b. Based on the economic situation in 2009, discuss the
disequilibrium (surplus or deficits) in the current account balance,
financial account balance, and the balance of payment. (maximum
500 words).

In 2009, The global financial crisis triggered concerns of a possible

economic crisis and put all economies under severe pressure, including
Vietnam’s. The Vietnamese economy faced severe challenges so the balance of
payment was under severe pressure.
CURRENT ACCOUNT
Current account deficit in 2009 reached US $6.6 billion because trade
balance and net income all declined however it was considerably narrowed as
compared to that in 2008.

Trade deficit
The trade balance had a deficit of 12.85 billion USD, down to 35% compared to
2008. Export turnover of goods reached 57.1 billion USD, decrease 8.9% compared to
2008; goods import turnover was 69.95 billion USD, decrease 13.3% compared to 2008.
Thus, the total import-export turnover of the whole country in 2009 was USD 127.05
billion, down 11.4% compared to 2008. Vietnam's import and export turnover decreased
in 2009 because commodity prices fell on the global market. (General Department of

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Vietnam Customs, 2010).
There are 11 main exported goods whose export turnover reached over US $1
billion consists of textiles; rice; seafood; coffee; crude oil; coal; petroleum; rubber; wood
and wood products; shoes; computers electronic products and components; machinery,
tools and spare parts. Textiles was the leader of export industry with total US $9.06
billion. Compared to 2008, Vietnamese agricultural export goods had pretty higher
volume growth. Nevertheless, under global economic depression, prices of these goods
went down which resulted in lower export turnover.
Meanwhile, the main imported items are machinery, equipment and spare parts;
Petroleum; raw materials for the textile, garment and footwear industries with a total
turnover of 12.67 billion USD (down 3.3% compared to 2008), 6.3 billion USD (down
47%) and 7.36 billion USD (down 8.5%)
Investment income
Investment income deficit of 4.53 billion USD, down 3% compared to 2008. The
source of income were income from deposit interest of the banking system and income
from the investment profits of enterprises Vietnamese industry abroad is estimated to
decrease 44.6% compared to 2008. Expenses of categories investment income decreased
by 8.2% compared to 2008 due to foreign investors' profits effect in the oil and gas sector
decreased with Crude oil price downtrend in the market world.

FINANCIAL AND CAPITAL ACCOUNT

Net foreign direct investment (FDI) into Vietnam total 6.9 billion USD in 2009,
decrease 25.6 percent from 2008. According to The Ministry of Planning and Investment,
FDI registered in Vietnam reached US $21.48 billion, capital reached US $10 billion that
equals to 30% compared to 2008. The reason for this reduction was that all investing
countries were affected strongly by recession. There was an increase in foreign loans
capital inflows, but the debt structure changed shift toward increasing medium- and long-
term debt while decreasing short-term debt.

BALANCE OF PAYMENTS
With the errors and omissions of the balance of payments reached a stunning 13.1
percent of GDP, balance of payments was in deficit US $8.8 billion in spite of financial
and capital account surplus which was expected can offset current account deficit. The
BOP of Vietnam was expected to continue in deficit without reasonable policies from the
government.
c. How did the State Bank of Vietnam (SBV) respond to this situation
through exchange rate policy and foreign exchange market
intervention? Show that the SBV actually moved to a more flexible
6
 exchange rate policy during this period. (maximum 500 words).
The global financial crisis affected the whole Vietnam’s economy, including the
balance of supply and demand of foreign currencies in the country. Faced with that
situation, the State Bank of Vietnam (SBV) had flexible exchange rate to achieve the
objectives of the exchange rate policy: supporting liquidity, contributing to boosting
exports, curbing inflation and stabilizing the economy macroeconomics.
The nominal depreciation of VND against the USD has been a common trend in 2009.
The official currency rate VND/USD grew by 5.6 percent from the end of 2008 to the end
of 2009. Another year in which the commercial bank rate was constantly near the top of
the State Bank of Vietnam's announced fluctuation range was 2009.
From March until June, many businesses kept foreign currency on the market and
refused to sell them to banks. The SBV has implemented many measures:
- The State Bank of Vietnam decided to increase the exchange rate band from +/-3%
to +/-5%, effective March 24, 2009, in order to narrow the gap between the free
and official markets.
- Increasing control foreign exchange business activities of credit institutions to
ensure that credit institutions strictly comply with foreign exchange management
regulations on listing and trading.
- Implement measures to create synchronization among commercial banks, such as
agreeing to raise USD deposit rates and reducing interest rates on foreign currency
loans, in order to balance the supply and demand for foreign currency.
Consequently, the correct and appropriate measures of the State Bank have helped the
foreign exchange market in the third quarter of 2009 to be relatively stable.
In November 2009, the supply and demand for foreign currencies imbalanced due to
the influence of information about the trade balance deficit and the decline of foreign
exchange reserves, especially under the impact of gold price fever. In this period, the SBV
has a very flexible exchange rate adjustment:
- The SBV decided to directly affect the exchange rate when adjusting the average
interbank exchange rate by 5.44% from 17,034 VND/USD per day to 17,961
VND/ 1 USD to combat currency speculation and relieve market pressure.
- The SBV narrowed the USD/VND exchange rate band from ±5% to ±3% and
raised the basic interest rate in VND from 7% to 8%.
In order to help Vietnam overcome crisis, the SBV combines exchange rate and
monetary policy in a flexible manner. The SBV's monetary policy has been carefully
loosening, supporting liquidity, and allowing financial institutions to extend credit
effectively. The State Bank, in particular, was adamant on keeping the basic interest rate
at 7% for the next ten months (from February to November 2009).
d. Using the DD-AA model, show that the adoption of a more flexible
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 exchange rate policy assisted the economy in mitigating the
adverse effects of global economic recession.

- With fixed exchange rate:

(Source: International Economics, p.473)

In this diagram, the initial equilibrium is at point 1 with exchange rate E0 and output Y1.
When the SBV increase money supply by buying more domestic assets, AA1 shifts
upward to AA2. However, with fixed exchange rate at E0, this monetary policy does not
effect.

When SBV increase domestic money supply, even small amount, VND will still be
depreciated. They have no choice except from selling foreign assets due to the fixed
exchange rate until the money supply returns to the initial level AA1. As a result, nothing
has changed.

- With flexible exchange rate:

8
 (Source: International Economics, p.438)

In this diagram, the short-run effect of temporary increase in domestic money supple is
shown. When SBV increase the money supply, AA1 will shift upward to AA2 (with no
influence on the position of DD). Consequently, the market equilibrium from initial point
1 with exchange rate E1 and output Y1 will move to point 2, with new exchange rate E2
and new output Y2. Therefore, an increase in money supply will result in the
depreciation of domestic currency, the output will be expanded leading to more jobs.

At the initial output Y1 and given fixed price level, when SBV increases domestic money
supply , the interest rate of domestic currency will reduce and cause the devaluation of
domestic currency. Thus, Vietnamese products will be cheaper and become more
attractive for customers. These goods now have comparative advantage in terms of price
compared to others. The aggregate demand will go up and result in a raise of output and
employment.

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 Problem 2 (4 points): The following table shows the inflation rates in the
U.S. and European countries at the end of 1960s and the early 1970s.
Table 2: The inflation rates in the U.S. and European countries during 1966-1972
(unit: %)

Country 1966 1967 1968 1969 1970 1971 1972

Britain 3.6 2.6 4.6 5.2 6.5 9.7 6.9
France 2.8 2.8 4.4 6.5 5.3 5.5 6.2
Germany 3.4 1.4 2.9 1.9 3.4 5.3 5.5
Italy 2.1 2.1 1.2 2.8 5.1 5.2 5.3
United States 2.9 3.1 4.2 5.5 5.7 4.4 3.2
Source: OECD
a. Discuss the trend in the inflation rates between the U.S. and European
countries during this period.
b. Explain why, with the exception of the U.S., monetary policies were
ineffective under the Bretton-Woods fixed exchange rate system. (Hint:
you should use the DD-AA diagram for this question).
c. Explain the observed relation between the inflation rates in the U.S.
and European countries. Use the diagram of internal balance and
external balance to support your arguments.

KEY
a. Discuss the trend in the inflation rates between the U.S. and European
countries during this period.

The Table 2 compares the inflation rates in the US and European countries during
1966-1972. During this period, I think a special feature which we need to mention is
Britten Wood System – a system which the United States and European countries were all
under in this 7 years. Therefore, it is necessary to study fundamentally about this
monetary system that affected on the trend in the inflation rate before discussing
particularly this trend.
The Bretton Woods system of monetary management established the rules for
commercial and financial relations among the United States, Canada, Western European
countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton
Woods system was the first example of a fully negotiated monetary order intended to
govern monetary relations among independent states. Under this system, 44 member
countries develop parity policies based on the US dollar, which is priced in gold at $35
per ounce. Other currencies cannot be immediately changed to gold under the Bretton
Woods system, which stipulates that the US dollar is the only currency that is fully
1
convertible into gold. Countries must commit to pursuing economic and monetary
policies that are responsible for keeping their exchange rates within ±1% of the agreed
parity by buying or selling US dollars as needed. For the purpose of reducing
international currency exchange rate volatility, Bretton Woods system helped
international trade. But in reality, the outcome was not as same as expectation, led to the
failure of this system in 1970s.
The table above shows clear Bretton Wood System’s confusion. Britain has the
highest inflation rate among European countries at 9.7% in 1971. Inflation rate in Britain
generally increased but tended to fluctuate: from 1966 to 1971, the inflation rate tends to
increase rapidly, increasing from 3.6 to 9.7%, nearly 3 times. By 1972, the inflation rate
tended to decrease rapidly, from 9.7% to 6.9%. Despite the decline, Britain still has the
highest inflation rate. France: France's inflation rate is volatile. In the period 1966-1967,
the inflation rate remained at 2.8%, then gradually increased. By 1969, the inflation rate
in France reached its highest at 6.5%. In the period 1970 - 1971, the inflation rate was
only 5.3% and 5.5%. In 1972, the inflation rate in France increased slightly to 6.2%.
Ranked 2nd after Britain. Germany: Over the whole period, the inflation rate in Germany
is quite low and volatile. In 1966, the inflation rate reached 3.4% then dropped suddenly
to 1.4% in 1967. By 1968, the inflation rate increased to 2.9% and decreased to 1.9%. in
1969. In the period 1970-1972, the inflation rate increased again and increased to 5.5% in
1972 Italy: This is the country with the lowest inflation rate in the period 1966-1972 in
European. However, the level of inflation volatility in this country is very large. In the
period 1966 - 1969, inflation was maintained at a low level of < 3%, but in the period
1970 - 1972, inflation in this country skyrocketed to >5%, this level of inflation increased
slightly. in years (+1%). United States: During the period 1966 - 1972, the US was a
country with many fluctuations in inflation control. Inflation of this country increased
sharply in the period 1968-1970, peaked in 1970 with an inflation rate of 5.7%, then fell
sharply in 1971, the level of inflation fell to 4.4%, by 1972 only remaining 3.2%.

b. Explain why, with the exception of the U.S., monetary policies were
ineffective under the Bretton-Woods fixed exchange rate system.
(Hint: you should use the DD-AA diagram for this question).
In Bretton Wood System, only US was capable of changing the money supply and
thus, cause changes to the output and employment. On the other hand, other European
countries have to commit to maintain fixed exchange rate. So in this question, I divide
countries in Bretton Wood System into 2 groups including United States and other
European countries.
- First group: The United States

2
 (Source: International Economics, p.438)
In this diagram, the short-run effect of temporary increase in domestic money supple is
shown. When US increase the money supply, AA1 will shift upward to AA2 (with no
influence on the position of DD). Consequently, the market equilibrium from initial point
1 with exchange rate E1 and output Y1 will move to point 2, with new exchange rate E2
and new output Y2. Therefore, an increase in money supply will result in the
depreciation of US dollar, the output will be expanded leading to more jobs.

At the initial output Y1 and given fixed price level, when the United States increases
domestic money supply, the interest rate of US dollar will reduce and cause the
devaluation of US dollar. Thus, American products will be cheaper and become more
attractive for customers. These goods now have comparative advantage in terms of price
compared to others. The aggregate demand will go up and result in a raise of output and
employment.

- Second group: European countries

3
 (Source: International Economics, p.473)

In this diagram, the initial equilibrium is at point 1 with exchange rate E0 and output Y1.
When the European countries increase money supply by buying more domestic assets,
AA1 shifts upward to AA2. However, because these countries were under Bretton Wood
System in which exchange rate was fixed at E0, this monetary policy did not effect.

When the European countries increase domestic money supply, even small amount, their
domestic currencies will still be depreciated. They have no choice except from selling
their foreign assets due to the fixed exchange rate until the money supply returns to the
initial level AA1. As a result, nothing has change.

4
 c. Explain the observed relation between the inflation rates in the U.S.
and European countries. Use the diagram of internal balance and
external balance to support your arguments.

As previously explained in point a, inflation in the United States caused the US dollar to
devaluate, lowering the euro/USD exchange rate as the value of European currencies
declined in comparison to the highly inflationary USD. Nonetheless, because the
exchange rate maintains this ratio, investors view the dollar appreciating while domestic
currencies depreciating, so they sell dollars and purchase European currencies.. With the
aim of balancing and keeping the exchange rate fixed, central banks in Europe have to
buy excess USD and sell their own currencies, which causes the money supply to increase
and leads to inflation in other countries. Europe country.

In addition, the internal and external balance graphs of European countries can be seen as:

Initially the internal balance and the outer balance intersect at equilibrium point 1.

With US inflation causing the exchange rate of the European currencies/USD to fall and
the internal balance and the external balance should have intersected at point 2.
But because the exchange rate is fixed, the real equilibrium remains at point 1. There
according to the theory of the model:

European countries are overproducing potential, and have surpluses at current account.
The fact that there is an overemployment that causes high output to increase the price of
input costs such as wages and raw materials and thus, output prices rise This increases the
general price level and leads to inflation in European countries.