Economics
External Balance
External balance refers to a country's equilibrium in its international trade and financial transactions. It is achieved when a nation's current account balance, which includes trade in goods and services, and its capital account balance, which includes financial investments and transfers, are in equilibrium. A surplus or deficit in the external balance can impact a country's currency value and overall economic stability.
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11 Key excerpts on "External Balance"
- Eckhard Siggel(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Chapter 6 External Balance and the Exchange RateIn earlier chapters the problem of External Balance was briefly mentioned; in particular, we discussed in Chapter 4 how the aggregate growth rate may depend either on the savings or on the foreign exchange constraint, and in Chapter 5 , External Balance was taken as one of the policy goals determining trade policies. In this chapter we review the external account in some more detail and examine the objective of External Balance, as well as the policy tools to achieve it. In this context, the exchange rate and its variation are of central importance. The exchange rate is an important link between the macroeconomic goals of stability, growth and External Balance on the one hand, and the microeconomic concerns of efficiency, protection and relative prices on the other. The discussion will be further extended to stabilization and structural adjustment programmes in Chapter 8 .6.1 Review of the External Account
The external account or balance of payments consists of two parts, the current account and the capital account. The current account includes all those operations that are confined to the accounting period: usually a fiscal year. The capital account, on the other hand, includes those transactions that have financial consequences beyond the accounting period, such as foreign borrowing or lending, which lead to foreign debt or credit, and foreign investment, which results in foreign ownership of domestic capital, and domestic ownership of foreign capital.The current account captures several types of transactions, such as merchandise trade, trade in services, factor service payments, and unilateral transfers. The merchandise trade balance is the most important part of the current account and is, for simplification, often taken as representative of the entire current account. This was the case in our earlier discussion of foreign saving, where we simply equated the foreign capital inflow with the trade balance. We can now be more precise and review further components of the current account. Trade in services, such as tourism, international transport, international financial services and insurance are becoming increasingly important to those developing countries that have a competitive advantage in these labour-intensive activities. One of the major contributions of the Uruguay Round of trade negotiations at the level of the GATT was the inclusion of trade in services. For countries like Kenya, for instance, the foreign revenue from tourism is as important as the revenue from the traditional cash crops, coffee and tea. Factor services are an important expenditure for countries that host much foreign investment and/or employ many foreign workers, since both lead to a continuous outflow of foreign exchange. Unilateral transfers, like grants of official development assistance, and private transfers from individuals working abroad, can be important sources of foreign exchange inflows.
eBook - ePub- John Pitchford(Author)
- 2002(Publication Date)
- Routledge(Publisher)
Chapter 1 External Balance Aside from national income and employment, few macroeconomic aggregates have received the prominence that is commonly accorded to the current account balance. The objective of this book is to elucidate the significance of this account in the balance of payments. 1 Other macro magnitudes which governments attempt to influence, such as unemployment, growth and inflation, have welfare implications that are reasonably intuitive. The current account balance, being the net outcome of sources and uses of foreign currency for ‘current’ purposes, is much less transparent. Indeed, it is curious that an imbalance on the current account in the balance of payments is sometimes regarded as detrimental and sometimes beneficial depending on the focus of the analysis. In particular, if the current account balance is viewed as a net use of foreign exchange, deficits have often been taken to signal problems for macroeconomic policy, particularly exchange rate management. On the other hand, when a perspective recognising that current account imbalances allow for differences to exist between national investment and saving is taken, a favourable judgement is often made. From this viewpoint it identifies the potential for a more efficient use of world saving made possible by financial capital mobility. Another interpretation stems from the fact that current account imbalances are the source of a country’s net obligations to foreigners. Net indebtedness to foreigners is sometimes held to be a burden for domestic residents. Because these different perspectives on the current account are connected by identities, divergent judgements on its ultimate net benefit cannot all be right
eBook - PDF- Martha L. Olney(Author)
- 2011(Publication Date)
- Wiley(Publisher)
286 Chapter 16 Open Economy Macroeconomics • Current account surplus • Current account deficit • Financial inflows • Financial outflows • Financial account surplus • Financial account deficit • Reserve account • Official reserve transaction (ORT) • Statistical discrepancy • Balance of payments surplus • Balance of payments deficit • Exchange rate • Foreign currency or foreign exchange • Floating exchange rates • Exchange rate regime • Fixed exchange rates • Peg • Managed (dirty) float KEY EQUATIONS • Trade balance = exports of goods and services − imports of goods and services • Balance on current account = trade balance + net factor income + net international transfer payments • Balance on financial account = financial inflows − financial outflows • Balance of payments = balance on current account + balance on financial account KEY GRAPH • Exchange rate INTERNATIONAL TRADE POLICIES When one country can produce a good relatively well and another country can produce a different good relatively well, there are economic incentives for the two countries to specialize and trade. This is the idea of the gains from trade that we first covered in Chapter 2. When one country has the comparative advantage in the production of a good because its opportunity cost of producing the good is lower than another country’s opportunity cost of producing the same good, the country should specialize in producing the good in which it has the comparative advantage in production. The other country can produce a good in which it has the comparative advantage in production. The two countries then trade. Total worldwide production and consumption of the goods increase. International trade can therefore benefit a International Trade Policies 287 country, because there are long-run gains: the country can end up with more output than it would have without trade. Some countries want to increase their exports for more immediate gains.
eBook - PDF- Henk Jager, Catrinus Jepma(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
CHAPTER 11 The Balance of Payments and the Foreign-Exchange Market 11.1 Introduction A country’s balance of payments is a summary of the economic transactions between that country and the rest of the world over a particular period of time – usually a month, a quarter, or a year. These transactions are classified into homogeneous groups. The main classification of the balance of payments is into two accounts: (i) the current account , which records the transactions associated with the international trade in goods and services, and (ii) the financial account , which shows all international capital transactions. The main sub-division of the financial account is that between long-term and short-term capital flows, which reflects the underlying idea that long-term flows are much more stable over time than short-term flows. One of the most notorious of all short-term flows is speculative capital, so-called ‘hot’ money, the enormous funds that can flow in and out of economies almost instanta-neously. The growth in these flows is believed to have had a destabilizing effect on national economies and has been the subject of much criticism during the currency crises since 1990. Although the balance of payments is drawn up for a single country, it is of course possible – and may be useful – to consolidate balances of payments for a group of countries. One important recent example is the combined balance of payments for the Euro area – those European countries that have adopted a common currency, the euro. For the purpose of statistical processing it is necessary to have a detailed knowledge of how transactions are recorded on the balance of payments. Of course, this knowledge is also required, if in less detail, for a proper analysis of a country’s balance of payments or an international comparison of balance-of-payments positions.
eBook - PDFTrading Economics
A Guide to Economic Statistics for Practitioners and Students
- Trevor Williams, Victoria Turton(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
And that is not always clear-cut. For example, one of the positives of having a cheap currency is that it can encourage investors to switch production to your economy, as exports from your country are cheaper than those from other countries they could locate in. THE CONCEPT OF THE BALANCE OF PAYMENTS The UK’s balance of payments measures its transactions with the rest of the world. It is one of the most important of the data releases each month and has been known to bring down governments, or at least it has been accused of helping them to lose elections. The balance of payments helps to determine the value of the currency and therefore helps to determine domestic prices of goods and services. It directly impacts living standards, employment and the ability of the country to pay its way in the world and for its people to maintain their standard of living. By measuring economic transactions between the UK and the rest of the world, the balance of payments shows how the net flow of the 200 Trading Economics balance of goods and services between inward and outward activities is funded. It encompasses: ∙ Exports and imports of visible goods, such as cars, food, medicines, capital goods and machinery. ∙ Exports and imports of services such as travel, financial, legal and education. ∙ Net flows of income between the UK and the rest of the world, such as interest earned on investment here and abroad, equity returns, dividends and so on. ∙ Flows such as investment in companies and plant and machinery in the UK and outside by UK firms. ∙ Transfers such as those that take place when migrants in the UK send funds overseas and UK migrants abroad send money back to people in the UK. These are all netted out to show the balance position. What does this mean exactly? Table 7.1 gives an example that follows this trail. In theory, any business transaction must have two sides to it – one thing is exchanged for another of equal value.
eBook - PDFInternational Economics
Global Markets and International Competition
- Henry Thompson(Author)
- 2000(Publication Date)
- WSPC(Publisher)
For economies highly dependent on export industries, international price changes can be critical. Examples of countries highly dependent on particular goods are Colombia on coffee, Saudi Arabia on oil, Costa Rica on bananas, South Africa on gold, and so on. Even for large diversified industrialized countries like the US, changes in international prices can be important. When the price of imported oil rose with the oil embargoes of the 1970s, shocks reverberated through the economy. Changes in international prices can be overwhelming for industries or firms. 337 :HAPTER IO Balance of Payments 338 Chapter 10 Balance of Payments Given the thousands of international markets and continuous adjustments taking place, no country will spend on imports exactly what it earns in exports during any year. This chapter introduces the current account, which estimates international cash flows connected with current transactions. The current account includes trade in goods and services plus net international interest payments. If the current account does not equal zero, international borrowing or lending must take place. A current account deficit can be financed through international borrowing or spending accumulated wealth. This chapter describes the fundamental mechanisms of balance of payments (BOP) adjustment. The foundation is the balance on goods and services (BGS). The current and capital accounts of the BOP reflect the international adjustment process. One issue is whether the government should use economic policy to influence the balance of trade. Fiscal policy refers to government spending and taxation. Monetary policy refers to control of the money supply. Fiscal and monetary policies are poor tools for influencing the BOP. The links between government budgets and the BOP are explored. A. ELASTICITIES AND THE TRADE BALANCE Changing prices of traded goods affect export revenue and import spending.
- A. Makin(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
93 6 External Imbalances, Exchange Rates and Interest Rates Introduction This chapter examines the relationship between exchange rates, global imbalances, international borrowing and lending behaviour and long-term real interest rates. It establishes which domestic and international macroeconomic variables primarily influence exchange rates, external imbalances and global interest rates over any given time for both large and small borrower economies. The current account, capital account and the exchange rate This section aims to improve our understanding of exchange rate behaviour by advancing a model of the exchange rate that is uniquely premised on the macroeconomic fundamentals of national spending and production and international capital flows. In the voluminous exchange rate literature, two broad streams characterize macro-oriented approaches to exchange rate determi- nation. First, much research has sought to resolve the significance of changing national price levels for a multitude of currencies over different time horizons by testing purchasing power parity (PPP), although with mixed results. (See, for example, Imbs et al. 2005; Lopez 2008; Papell 2004; Taylor 2002.) Second, a parallel literature has examined links between exchange rates and monetary variables, such as relative money supplies and 94 Global Imbalances, Exchange Rates and Policy interest rates, also with mixed results (see, for instance, Meese and Rogoff 1983; Flood and Rose 1999; Macdonald 1999; Engel et al. 2007). In contrast, policymakers and participants in foreign exchange markets have long drawn links between current account outcomes and exchange rate movements. Moreover, researchers readily con- nect the consequences of exchange rate movements to current account adjustment in the spirit of the well-known Marshall-Lerner analysis (see Dornbusch 1996; Frankel and Rose 1995; Goldstein and Khan 1985; Hooper et al. 2000; Marquez 2002).
eBook - PDF- Dominick Salvatore(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Governments also regularly consult the balance of payments of important trade partners in making policy decisions. The information contained in a nation’s balance of payments is also indispensable to banks, firms, and individuals directly or indirectly involved in international trade and finance. The definition of the balance of payments just given requires some clarification. First of all, it is obvious that the literally millions of transactions of the residents of a nation with the rest of the world cannot appear individually in the balance of payments. As a summary statement, the balance of payments aggregates all merchandise trade into a few major categories. Similarly, only the net balance of each type of international capital flow is included. Furthermore, the balance of payments includes some transactions in which the residents of foreign nations are not directly involved—for example, when a nation’s central bank sells a portion of its foreign currency holdings to the nation’s commercial banks. An international transaction refers to the exchange of a good, service, or asset (for which payment is usually required) between the residents of one nation and the residents of other nations. However, gifts and certain other transfers (for which no payment is required) are also included in a nation’s balance of payments. The question of who is a resident of a nation also requires some clarification. Diplomats, military personnel, tourists, and workers who temporarily migrate are residents of the nation in which they hold citizenship. Similarly, a corporation is the resident of the nation in which it is incorporated, but its foreign branches and subsidiaries are not. Some of these distinctions are, of course, arbitrary and may lead to difficulties. For example, a worker may start by emigrating temporarily and then decide to remain abroad permanently.
eBook - PDFFrom Central Planning to the Market
Transformation of the Czech Economy 1989 – 2004
- Libor Zidek(Author)
- 2017(Publication Date)
- Central European University Press(Publisher)
The basic structure of the balance of payments that ensues from the IMF Balance of Payments Manual (5th edition, 1993) includes the current, the capital and the financial accounts, change in foreign exchange reserves. The current account records the flow of goods (export and import) and services (income and expenses from transport services, travel and other commercial and noncommercial services), income from capital, investments and labor (interest, dividends, reinvested profits, earned income) and the balancing items for the real and financial resources provided or acquired without counter-value (current unilateral transfers, such as gifts, alimonies, pensions, foreign aid). The capital account consists of transfers of capital character connected with the migration of the population, remission of debts, ownership rights to fixed assets (for example investment grants) and transfers of not manufactured, non-financial tangible assets (for example land—representations sites) and intangible rights (patents, licenses, copyrights, and so on). 15 The financial account includes transactions connected with the rise, extinction and change in ownership of the financial assets and liabilities of the government, the banking and corporate spheres and other entities in relation to abroad. It provides information on the financial (capital) flows in the break-down into direct investments (registered capital and other capital), portfolio investments of equity and debt character, financial derivatives and other investments, broken down into long-term and short-term and by the basic sectors (the CNB, commercial banks, the government, FROM CENTRAL PLANNING TO THE MARKET 192 and other sectors), under which fall supplier and bank credits, loans, deposits, participations in international non-monetary organizations et alia.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about. With record imbalances held up as one of the contributing factors to the financial crisis of 2007–2010, plans to address global imbalances are now high on the agenda of policy makers for 2010. Composition of the balance of payments sheet Standard definition Since 1974, the two principal divisions on the BOP have been the current account and the capital account. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports – payments for imports) , factor income (earnings on foreign investments – payments made ____________________ WORLD TECHNOLOGIES ____________________ to foreign investors) and cash transfers. Its called the current account as it covers transactions in the here and now - those that don't give rise to future claims. The capital account records the net change in ownership of foreign assets. It includes the reserve account (the international operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account). Expressed with the standard meaning for the capital account , the BOP identity is: The balancing item is simply an amount that accounts for any statistical errors and make sure the current and capital accounts sum to zero. At high level, by the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts should balance.
eBook - PDF- Harms, Philipp(Authors)
- 2016(Publication Date)
- Mohr Siebeck(Publisher)
This, however, means that the country we consider is incurring ad-ditional liabilities, which is reflected by a financial account deficit. Conversely, a current account surplus which is not dominated by a capital account deficit 30 II The Balance of Payments necessarily implies an accumulation of claims towards the rest of the world, i.e. a financial account surplus. Beyond illustrating a technical result that immediately follows from the rules of balance of payments accounting, equation (2.1) points at an important rela-tionship that we will meet over and over again in this book: the financial account documents how a combined current account and capital account deficit is fi-nanced, or how a combined surplus of the current account and the capital ac-count is used to accumulate claims against the rest of the world. This, in turn, implies that the current account balance is not only driven by domestic and for-eign residents’ decisions on goods and services purchases as well as income flows and current transfers, but also on financial markets’ willingness and abil-ity to finance deficits or to absorb surpluses. Equation (2.1) states that the balance of payments is always in equilibrium . Nevertheless, people sometimes refer to balance of payments surpluses or bal-ance of payments deficits . Such statements are usually based on a distinction between the reserve assets part and the other components of the financial ac-count. If we adopt this distinction and define 1 t R as the net increase of reserve assets held by monetary authorities between the start of period t and the start of period 1 t , we can rewrite equation (2.1) as (2.2) 1 t NR t t t R FA KA CA In this expression, NR t FA is the (“non-reserve”) part of the financial account that does not reflect monetary authorities’ purchase or sale of foreign-currency de-nominated assets.
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