MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

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MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT
2nd edition

• The Current Account, the Balance of Payments, and
  National Wealth

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Current Account (NA)

• National Accounts Approach to the Current Account
• GNI (GNP) income generated by domestically
  owned factors of production anywhere in the world
• GDP C I G NX
• GNI GDP NFP (net factor payments from
  abroad)
• NFP payments to domestically owned factors
  (labor and capital) located abroad minus payments
  to foreign factors located domestically
• Payments (1) net dividends, interest, rent to
  residents owing assets abroad and (2) net wages
  to residents working abroad

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Current Account (NA)

• GNI GDP NFP
• total income earned
• GNDI GDP NFP NFT
• GNDI gross national disposable income
• NFT net unilateral transfers abroad
• remittances, foreign aid
• total income available

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Current Account (NA)

• Private sector net income private sector income
  earned at home (Y or GDP) and abroad (NFP NFT)
  payments from the government sector (transfers,
  TR, and interest on government debt, INT) taxes
  paid to government (T)
• Y NFPNFT TR INT T
• Public sector net income taxes transfers
  interest payments
• T TR INT

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Current Account (NA)

• As a check private income public income GNDI
• (Y NFP NFT TR INT T ) ( T TR INT
  )
• GDP NFPNFT
• GNI NFT
• GNDI

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Current Account (NA)

• Private and Public Saving
• private saving private income consumption
• public saving public income public purchases

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Current Account (NA)

• National Saving private saving public saving

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Current Account (NA)

• S Y NFP NFT C G
• S (C I G NX) NFP NFT C G
• S I (NX NFP NFT), set CA NXNFPNFT
• S I CA
• CA S I savings-investment approach
• -if CAlt0, then
  insufficient savings
• CA NX NFP NFT
• NX (GNDI GDP)
• NX (GNDI C I G NX)
• CA GNDI (C I G) absorption approach
• -if CAlt0, then living beyond
  means

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Current Account (CA)

• Why Current Account Deficits?
• CA S I
• CA Spvt Sgovt I
• investment boom generally good
• fall in private saving good or bad
• Attending graduate school good
• Luxurious living bad
• fall in government saving good or bad
• Public investment can be good
• Running chronic deficits bad

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Current Account (BOP)

• Balance of Payments (BOP) Accounting
• Why BOP Accounting?
• BOP analysis helps us understand current account
  imbalances
• BOP analysis helps us understand economic crisis
  driven by volatile international financial flows
• The accounting record of a countrys
  international transactions

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Current Account (BOP)

• Balance of payments accounting
• Any transaction that involves a flow of funds
  into the United States is a credit ()
• item (enters with a plus sign) for example,
  exports
• Any transaction involving a flow of funds out of
  the United States is a debit ()
• item (enters with a minus sign) for example,
  imports

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Current Account (BOP)
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Current Account (BOP)

• (1) Net exports of goods and services
• services
• U.S. family vacations in Mexicoimport of tourism
  services (debit, funds flow out of U.S.)
• Foreign student in U.S.export of education
  services (credit, funds flow into U.S.)
• (2) Net income from abroad (similar to NFP)
• income receipts from abroad minus income payments
  to abroad
• Income received from abroad is a credit item,
  since it causes funds to flow into the United
  States
• Payment of income to foreigners is a debit item
• Net income from abroad is part of the current
  account, and is about equal to NFP, net factor
  payments
• Examples-U.S.
• (1) income from residents working abroad
• (2) investment income from abroadinterest
  payments, dividends, royalties, etc.
• (3) Net unilateral transfers (similar to NFT)
• Payments made from one country to another that do
  not correspond to a good, service, or asset (if
  they were, where would they be counted?)
• Negative net unilateral transfers for United
  States, since United States is a net donor to
  other countries

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Current Account (BOP)

• Sum of net exports of goods and services, net
  income from abroad, and net unilateral transfers
  is the current account balance
• Positive current account balance implies current
  account surplus
• Negative current account balance implies current
  account deficit
• Note Can have CAlt0 with NXgt0
• you can have trade surplus and have massive debt
  payments (NFP)

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The Rest of the BOP

• Capital and Financial Account
• The capital account part
• the net flow of unilateral transfers of assets
  (debt forgiveness, personal assets migrants take
  with them, transfer of real estate such as a
  military base or embassy)
• The financial account part
• trades in existing assets, either real (for
  example, buildings) or financial (for example,
  stocks and bonds)
• FDI
• Portfolio
• debt
• equity

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The Rest of the BOP

• Note capital and financial account used to be
  called capital accountso its common to still
  here people say the current account and the
  capital account
• capital account crisis
• Most transactions appear in the financial account
  
• When home country sells assets to foreign
  country, that is a capital inflow for the home
  country and a credit () item in the capital and
  financial account
• U.S. government sells t-bills to foreigners
• When assets are purchased from a foreign country,
  there is a capital outflow from the home country
  and a debit () item in the capital and financial
  account

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The Rest of the BOP
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The Rest of the BOP

• Relationship between the (1) current account and
• (2) The capital and financial account
• Current account balance (CA) capital and
  financial account balance (KFA) 0
• CA KFA 0 by accounting every transaction
  involves offsetting effects
• In practice, measurement problems, recorded as a
  statistical discrepancy, prevent CA ? KFA 0
  from holding exactly.

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The Rest of the BOP

• The official settlements balance
• Transactions in official reserve assets are
  conducted by central banks of countries
• Official reserve assets are assets (foreign
  government securities, bank deposits, and SDRs of
  the IMF, gold) used in making international
  payments
• Central banks buy (or sell) official reserve
  assets with (or to obtain) their own currencies
• Official settlements balance
• (1) Also called the balance of payments, it
  equals the net increase in a countrys official
  reserve assets
• (2) For the United States, the net increase in
  official reserve assets is the rise in U.S.
  government reserve assets minus foreign central
  bank holdings of U.S. dollar assets
• Having a balance of payments surplus means a
  country is increasing its official reserve
  assets a balance of payments deficit is a
  reduction in official reserve assets

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National Wealth

• National Wealth and the balance of payments
  accounts
• National Wealth domestic physical assets net
  foreign assets
• Net foreign assets (NFA) are a countrys foreign
  assets minus its foreign liabilities
• foreign assets foreign stocks, bonds, and
  factories
• foreign liabilities domestic and financial
  assets owned by foreigners
• NFA changes due to (1) value change and (2)
  through acquisition of new assets or liabilities

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National Wealth

• A current account surplus implies a capital and
  financial account deficit, and thus a net
  increase in holdings of foreign assets
• a financial outflowexcess savings to the world
  and getting in return (1) IOUs, or (2) other
  assets, or (3) foreign liabilities reduced
• A current account deficit implies a capital and
  financial account surplus, and thus a net decline
  in holdings of foreign assets
• a financial inflowpulling in excess savings from
  the world and giving out(1) IOUs, or (2) other
  assets, or (3) or reducing foreign assets)
• International Investment Position NFA
• International Investment Position ? External Debt
• however, large portions of current account
  deficits are often finance by external debt

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National Wealth

• U.S. International Investment Position
• Largest debtor to the world in absolute dollars
  (2.43 trillion, 2003, 22 of GDP)
• What really matters is not size of net foreign
  liabilities but countrys wealth (physical and
  human capital)
• If net foreign liabilities rises and wealth
  rises, theres no problem (collateral offsets
  debt)
• U.S. wealth isnt rising as much as net foreign
  liabilities which is worrisome

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