Contents Measure Nations levels of international economic activity

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Contents Measure Nation’s levels of international economic activity, and how it is measured by

Contents Measure Nation’s levels of international economic activity, and how it is measured by the balance of payments; Examine the economic relationships underlying the two basic sub components of the balance of payments – the Current and Capital Accounts; Identify the financial dimensions of international economic activity, and how they differ between merchandise & services trade; Identify balance of payment activities by nations in pursuit of domestic and global economic and political policies; Evaluate the history of capital mobility, and conditions that lead to capital flight in times of crisis

The Balance of Payments • The Balance of payments is the summary statement of

The Balance of Payments • The Balance of payments is the summary statement of • all international transactions between one country and all other countries ---- Eiteman The measurement of all international economic transactions between the residents of a country and foreign residents is called the Balance of Payments (BOP) The IMF is the primary source of similar statistics worldwide Multinational businesses use various BOP measures to test the growth and health of specific types of trade or financial transactions by country and regions of the world against the home country

Importance of The Balance of Payments Monetary and fiscal policy must take the BOP

Importance of The Balance of Payments Monetary and fiscal policy must take the BOP into account at the national level 2. Businesses need BOP data to anticipate changes in host country’s economic policies driven by BOP events 3. Above of these, BOP data may be important for the following reasons 1. BOP is important indicator of pressure on a country’s exchange rate, thus potential to either gain or lose if firm is trading with that country or currency Changes in a country’s BOP may signal imposition (or removal) of controls over payments, dividends, interest, etc BOP helps to forecast a country’s market potential, especially in the short run

Typical BOP Transactions • Examples of BOP transactions from US perspective ¤ ¤ ¤

Typical BOP Transactions • Examples of BOP transactions from US perspective ¤ ¤ ¤ Honda US is the distributor of cars manufactured in Japan by its parent, Honda of Japan US based firm, Fluor Corp. , manages the construction of a major water treatment facility in Bangkok, Thailand US subsidiary of French firm, Saint Gobain, pays profits (dividends) back to parent firm in Paris An American tourist purchases a small Lapponia necklace in Finland A Mexican lawyer purchases a US corporate bond through an investment broker in New York. Give some Examples of BOP transactions from Bangladesh perspective

B. Capital Account Capital transfers related to purchase and sale of fixed assets such

B. Capital Account Capital transfers related to purchase and sale of fixed assets such as real estate C. Financial Account A. Net foreign direct investment B. Net portfolio investment C. Other financial items D. Net Errors and Omissions Missing data such as illegal transfers E. Reserves and Related Items Changes in official monetary reserves including gold and foreign exchange reserves Σ (A: E) = Overall Balance A. Current Account A. Net exports/imports of goods and services (Balance of Trade) B. Net Income (investment income from direct portfolio investment plus employee compensation C. Net transfers (sums sent home by migrant and permanent workers abroad)

Fundamentals of BOP Accounting • The BOP must balance (!? ) • Three main

Fundamentals of BOP Accounting • The BOP must balance (!? ) • Three main elements of actual process of measuring international economic activity 1. Identifying what is/is not an international economic transaction 2. Understanding how the flow of goods, services, assets, money create debits and credits 3. Understanding the bookkeeping procedures for BOP accounting

Defining International Economic Transactions • Current Account Transactions The export of merchandise, goods such

Defining International Economic Transactions • Current Account Transactions The export of merchandise, goods such as trucks, machinery, computers is an international transaction ¤ Imports such as French perfume and cosmetics, Japanese cameras and German automobiles are international transactions ¤ The purchase of a Benaroshi Shari in Dhaka by an Indian tourist Financial Account Transactions ¤ The purchase of a Bangladesh Bank’s Treasury bill by a foreign resident ¤ •

BOP as a Flow Statement • Exchange of Real Assets – exchange of goods

BOP as a Flow Statement • Exchange of Real Assets – exchange of goods and services for other goods and services or for monetary payment • Exchange of Financial Assets – Exchange of financial claims for other financial claims

The Current Account • Goods Trade – export/import of goods. • Services Trade –

The Current Account • Goods Trade – export/import of goods. • Services Trade – export/import of services; common • • • services are financial services provided by banks to foreign investors, construction services and tourism services Income – predominately current income associated with investments which were made in previous periods. Additionally the wages & salaries paid to non-resident workers Current Transfers – financial settlements associated with change in ownership of real resources or financial items. Any transfer between countries which is one-way, a gift or a grant, is termed a current transfer Typically dominated by the export/import of goods, for this reason the Balance of Trade (BOT) is widely quoted

Examples of BOP’s Current Account US Current Account, 1997 -1999 (billions of US dollars)

Examples of BOP’s Current Account US Current Account, 1997 -1999 (billions of US dollars)

Practice: BOP Current account 2002 2003 Goods: exports 55, 884 56, 096 64, 052

Practice: BOP Current account 2002 2003 Goods: exports 55, 884 56, 096 64, 052 63, 676 65, 099 70, 577 Goods: imports 61, 215 65, 857 68, 865 61, 890 70, 530 85, 946 Assumptions (millions of US dollars) Balance on goods 1998 Services: credit 16, 181 17, 399 18, 677 16, 689 17, 906 21, 205 Services: debit 17, 272 18, 330 18, 388 16, 948 18, 107 21, 638 Income: debit ? 2001 ? Income: credit ? 2000 ? Balance on services ? 1999 ? ? 6, 532 7, 394 8, 984 8, 063 8, 194 9, 457 17, 842 18, 968 19, 516 18, 332 19, 884 24, 245 Balance on income ? ? ? Current transfers: credit 2, 651 3, 003 2, 622 2, 242 2, 310 2, 767 Current transfers: debit 2, 933 3, 032 2, 669 2, 221 2, 373 2, 851 ? ? ? Balance on current transfers

The Capital/Financial Account • Capital account is made up of transfers of fixed assets

The Capital/Financial Account • Capital account is made up of transfers of fixed assets such as real estate and acquisitions/disposal of non-produced/non -financial assets • Financial account consists of three components and is classified either by maturity of asset or nature of ownership. The three components are Direct Investment – Net balance of capital which is dispersed from and into a country for the purpose of exerting control over assets. This category includes foreign direct investment 2. Portfolio Investment – Net balance of capital which flows in and out of the country but does not reach the 10% ownership threshold of direct investment. The purchase and sale of debt or equity securities is included in this category This capital is purely return motivated 3. Other Investment Assets/Liabilities – Consists of various short and long-term trade credits, cross-border loans, currency and bank deposits and other accounts receivable and payable related to cross-border trade 1.

Example: The Capital/Financial Account Direct investment abroad Direct investment in the US Net direct

Example: The Capital/Financial Account Direct investment abroad Direct investment in the US Net direct investment (105) 106 1 (146) 186 40 (151) 276 125 Portfolio Investment Assets purchased by US residents, net Assets purchased by foreign residents, net Net portfolio investment (119) 386 267 (136) 269 133 (129) 342 213 Other Investment Other investment assets Other investment liabilities Net other investment (264) 265 1 (47) 27 (20) (159) 136 (23) Capital Account Balance 269 153 315

The Other Accounts • Net Errors and Omissions – Account is used to •

The Other Accounts • Net Errors and Omissions – Account is used to • account for statistical errors and/or untraceable monies within a country Official Reserves – total reserves held by official monetary authorities within a country. ¤ These reserves are typically comprised of major currencies that are used in international trade and financial transactions and reserve accounts (SDRs) held at the IMF

The Balance of Payments in Total A. Current Account 1997 (140. 55) 1998 (217.

The Balance of Payments in Total A. Current Account 1997 (140. 55) 1998 (217. 13) 1999 (331. 48) Goods exports FOB Goods imports FOB Goods (Balance Of Trade) 681. 65 (876. 37) (194. 72) 672. 29 (917. 19) (244. 90) 686. 66 (1029. 92) (343. 26) Services exports Services imports Services trade balance Income credit Income debit Balance on Goods, Services & Income. . . 255. 29 (166. 51) 88. 78 257. 35 (251. 16) 260. 69 (182. 68) 78. 01 258. 45 (264. 66) 269. 58 (191. 30) 78. 28 276. 17 (294. 65) (6. 21) (18. 48) 6. 19 Current transfers, credits 8. 47 9. 33 9. 41 Current transfers, debits (49. 27) (53. 36) (57. 43) _______________________________ Source: MSE 3, Exhibit 3. 7, page 55.

C. Financial Account 1997 1998 269. 04 153. 59 1999 314. 64 Direct investment.

C. Financial Account 1997 1998 269. 04 153. 59 1999 314. 64 Direct investment. . . Direct investment abroad Direct investment in the US 1. 02 40. 27 (105. 02) (146. 05) 106. 04 186. 32 124. 64 (150. 90) 275. 54 Portfolio investment assets. . . Equity securities Debt securities (118. 98) (136. 00) (57. 58) (101. 24) (61. 40) (34. 76) (128. 59) (114. 40) (14. 19) Portfolio investment liabilities. . . 385. 60 269. 33 342. 19 Equity securities 67. 85 41. 95 98. 07 Debt securities 317. 75 227. 38 244. 12 ______________________________ Source: MSE 3, Exhibit 3. 7, page 55

Capital Mobility • The degree to which capital moves freely cross-border • is critically

Capital Mobility • The degree to which capital moves freely cross-border • is critically important to a country’s balance of payments Historical patterns of capital mobility ¤ 1860 1914 – period characterized by continuously increasing capital openness as more countries adopted the gold standard and expanded international trade relations ¤ 1914 1945 – period of global economic destruction due to two world wars and a global depression ¤ 1945 1971 – Bretton Woods era, saw great expansion of international trade in goods and services ¤ 1971 2002 – period characterized by floating exchange rates, economic volatility, but rapidly expanding cross border capital flows

Capital Flight “International flows of direct and portfolio investments under ordinary circumstances are rarely

Capital Flight “International flows of direct and portfolio investments under ordinary circumstances are rarely associated with the capital flight phenomenon. Rather, it is when capital transfers by residents conflict with political objectives that the term “flight” comes into general usage. ” • Five primary mechanisms exist by which capital may be moved from one country to another: ¤ Transfers via the usual international payments mechanisms, regular bank transfers are easiest, cheapest and legal ¤ Transfer of physical currency by bearer (smuggling) is more costly, and for many countries illegal ¤ Transfer of cash into collectibles or precious metals, which are then transferred across borders ¤ Money laundering, the cross-border purchase of assets which are then managed in a way that hide the movement of money and its owners ¤ False invoicing on international trade transactions

In million US$ Items 1999 -00 200020012002200320042005 (June. July) 1 2 3 4 5

In million US$ Items 1999 -00 200020012002200320042005 (June. July) 1 2 3 4 5 6 7 -1865 -2011 -1768 -2215 -2319 -3297 Export f. o. b. (including EPZ) 5701 6419 5929 6492 7521 8573 Of which : garments (RMG) 4352 4860 4584 4912 5686 6418 -7566 -8430 -7697 -8707 -9840 -11870 -645 -914 -499 -691 -874 -870 849 759 865 887 924 1177 -1494 -1673 -1364 -1578 -1798 -2047 -302 -344 -402 -358 -374 -680 97 97 50 64 63 116 -399 -441 -452 -437 -796 -160 -168 -161 -167 -175 -203 2394 2171 2826 3440 3743 4290 Official 165 72 69 82 61 37 Private 2229 2099 2757 3358 3682 4253 Trade balance Readymade Import f. o. b. (including EPZ) Services Receipts Payments Income Receipts Payments Of which : Official interest payments Current transfers

In million US$ Items 1 1999 -00 2000 -2001 -2002 -2003 -2004 -2005 (June-July)

In million US$ Items 1 1999 -00 2000 -2001 -2002 -2003 -2004 -2005 (June-July) - - - 2 3 4 5 6 7 Of which : Workers' remittances 1949 1882 2501 3062 3372 3848 Current Account Balance -418 -1098 157 176 -557 561 432 410 428 196 163 -116 682 391 413 78 760 383 550 391 376 385 776 0 0 -6 2 6 0 -499 132 6 35 -313 -16 806 790 733 918 544 940 -396 -416 -435 -452 -397 -449 Other long term loans (net) 127 -13 -42 -20 -41 -46 Other short term loans (net) 71 31 63 142 13 241 Capital Account Capital transfers Financial Account Foreign direct investment (net)[1] Portfolio investment Other investment MLT loans (excluding suppliers credit) MLT amortization payments

In million US$ 199900 Items Other short loans (net) term 200020012002200320042005 (June. July) 71

In million US$ 199900 Items Other short loans (net) term 200020012002200320042005 (June. July) 71 31 63 142 13 241 Other capital -190 -114 -87 -125 -182 Trade Credit (net) -641 -260 -253 -499 -321 -320 Commercial Bank -276 114 27 71 14 -200 Assets -161 147 -90 217 86 -91 Liabilities -115 -33 117 -146 -72 -109 Errors and Omissions 152 -297 -550 -202 -279 -299 OVERALL BALANCE 179 -281 408 815 171 67 -179 281 -408 -815 -171 -67 Bangladesh Bank -179 281 -408 -815 -171 -67 Assets -79 302 -276 -887 -235 -225 -100 -21 -132 72 64 158 Reserve Assets Liabilities

Home Practice and Preparation 1. Try to answer the chapter end questions 2. Try

Home Practice and Preparation 1. Try to answer the chapter end questions 2. Try to solve the chapter end problems 3. Solve the chapter end case from the prescribed text and readings.