Lecture 9

The Balance of Payments

 Cash flow statement, change in a period ( 3 months, 6 months, 9 months)
 Follow your own money
 Different types of balance of payments
 Export: cash in
 Import: Cash out
 2 Majors:
o Current Accounts
o Financial Accounts
 Formula:

 What is going on in US?

o How market forces change issues change deficits and surpluses.
 o 2007: Current account is negative, deficit

o Financial account is positive when Current Account is negative and vice versa.
o However, China had a rare situation called Twin Surpluses where both was
positive.
 2000 jump in deficit for US?

o `China entering WTO, more imports from China

 The Capital (Real Estate for personal use) and Financial Account (FPI and FDI)
o Often combined but for this class separate.

o We are right now in between Protectionism and Free Trade

o Access to cash is the key for the global economy.
 o Need to know an example for capital mobility restrictions (Slide 27)
 Some BoP examples
o

o 2nd One: Portfolio Investment, falls under Financial Account

o 3rd One: Cash in for US, falls under US Current Accounts
o 4th One: Bank account is in US, so it doesn’t show up in the BoP, if student
wasn’t in the US, then it would count as BoP
 China’s Twin Surplus
o Both the current account and financial account was in a positive balance.
o Exporting more than importing (Current Account)
o Economy was growing a such a high rate, greater cash in than out for
investment (Financial Account)
o It doesn’t balance?? But it does.
 Investors were concerned of China’s growth so they decided to take
money out of China.
 Market catches up twin surplus ended.
o Example 1: Fixed rate:
 If everyone wants to invest in your country, demand for your currency
goes up. Then, you should increase supply to keep it at the
equilibrium. Taking in currency from other countries, foreign exchange
reserves are going up for China. For China’s currency point of view it is
cash out. Exchange reserves are negative while financial and current
accounts are positive, so it balances.
o Example 2: Fixed rate,
 If no one wants your money, currency demand goes down and supply
goes down as well. Foreign exchange reserves are going down: They
are using other currencies to get China’s currency back. Foreign
exchange reserves are positive. Current account is positive and
financial account is negative.
o Fixed rate: Countries responsibility to keep it 0.
 International Parity Conditions
o

o Absolute PPP: what is the implied rate. Actual rate is not equal to the implied rate

o 1) 18.6/ 6.678= 2.7852

o 2) 18.6/ 5.04= 3.69
o 3) Chinese yuan is undervalued.
o Actual: 6.678 yuan/ $
o Implied: 3.69 yuan/ $
o 3.69- 6.678/ 6.678= -44.7%