PART Ⅲ Financial theory ch11217.docx
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PART Ⅲ Financial theory ch11217.docx
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PARTⅢFinancialtheorych11217
Chapter12
NationalIncomeAccountingandtheBalanceofPayments
*Tworelatedandessentialaccountseconomistsusetodescribeacountry’slevelofproductionanditsinternationaltransactions
——Nationalincomeaccounts
——Balanceofpaymentsaccounts
§1.Thenationalincomeaccounts
1.Nationalincome、Nationalproduct、Nationalexpenditure
Nationalproduct
(1)
(2)
Nationalincome
(3)
Nationalexpenditure
(1)Everydollarofgoodsandservicesisalwaysdividedintowage、rent、interestandprofit,whichadduptoNI.(Moreaccurately,nationalincomeequalsGNPlessdepreciation,lessindirectbusinesstaxes,plusnetunilateraltransfers.)
Everyperson’sincomeisalwaysdividedintoconsumption(C)、personalsaving(SP)、andincometaxes(T).ThusY=C+SP+T
(2)Everydollarofgoodsandservicesisalwaysuseforconsumption(C)、investment(I)、governmentpurchases(G)、currentaccountbalance(CA=EX-IM).ThatisY=C+I+G+EX-IM
Nationalincomeidentityforanopeneconomy:
Sp=I+(G-T)+CA
(3)Everydollarusedtopurchasegoodsandservicesautomaticallyendsupinsomebody’spocket.
(GNPequalsGDPplusnetreceiptsoffactorincomefromtherestoftheworld.GNPtracksnationalincomecloselythanGDP.)
2.TheimplicationsoftheGNPidentity
(1)TheimportanceofCA.
·ChangesinCAcanbeassociatedwithchangesinoutputandemployment.
·CAmeasuresthesizeanddirectionofinternationalborrowing.
Acountrywithacurrentaccountdeficitmustbeincreasingitsnetforeigndebtsbytheamountofthedeficit.Thus,acountry’scurrentaccountbalanceequalsthechangeinnetforeignwealth.
Acountrywithacurrentaccountdeficitisimportingpresentconsumptionandexportingfutureconsumption——intertemporaltrade.
Y-(C+I+G)=CA
Acountry’scurrentaccountsurplusisoftenreferredtoasitsnetforeigninvestment.
(2)TheimplicationofSP=I+(G-T)+CA
·Acountry’sprivatesavingcantakethreeforms:
investmentindomesticcapital(I)
purchaseofthedomesticgovernment’snewlyissueddebt(G-T)
purchaseofwealthfromforeigners(CA)
·Anopeneconomycansaveeitherbybuildingupitscapitalstockorbyacquiringforeignwealth,butaclosedeconomycansaveonlybybuildingupitscapitalstock.
Sp+(T-G)=I+CA
Sp+(T-G)=SP+Sg=S
·Itispossiblesimultaneouslytoraiseinvestmentandforeignborrowingwithoutchangingsaving.
·Becauseprivatesaving,investment,thegovernmentdeficit,andthecurrentaccountarejointlydeterminedvariables,wecanneverfullydeterminethecauseofacurrentaccountchangeusingSp=I+(G-T)+(CA)alone.Buttheidentityprovidesanessentialframeworkforthinkingaboutthecurrentaccountandcanfurnishusefulclues.
Casestudy:
GovernmentDeficitReductionMayNotIncreasetheCurrentAccountSurplus.(P289-291)
§2.Thebalanceofpaymentaccounts
Acountry’sbalanceofpaymentaccountskeepstrackofbothitspaymentstoanditsreceiptsfromforeigners.
1.Howtorecordinternationaltransaction.
(1)Threetypesofinternationaltransactionarerecorded:
·Currentaccount——exportorimportofgoodsandservices.
·Financialaccount——purchaseorsaleoffinancialasset(suchasmoney,stocks,
factories,orgovernmentdebt).
·Capitalaccount——nonmarketinternationalassettransfers(theacquisitionor
disposalofnonproduced,nonfinancial,andintangibleasset).
(2)Anytransactionresultingapaymenttoforeignersisenteredasdebitandisgivenanegative(-)sign.Anytransactionresultinginareceiptfromforeignersisenteredasacreditandisgivenapostive(+)sigh.
(3)Theprincipleofdouble-entrybookkeeping:
Everyinternationaltransactionautomaticallyentersthebalanceofpaymentstwice,onceasacreditandonceasadebit.
(Ifyoubuysomethingfromaforeigneryoumustpayhiminsomeway,andtheforeignermustthensomehowspendorstoreyourpayment)
ExamplesofPairedTransactions(P293)
2.Thefundamentalbalanceofpaymentsidentity.
Becauseanyinternationaltransactionautomaticallygivesrisetotwooffsettingentriesinthebalanceofpayment,thetotalbalancemustbezero:
currentaccount+financialaccount+capitalaccount=0
3.Thebalanceofpaymentaccounts
(1)Example
(2)Someitems:
income,statisticaldiscrepancy,andofficialreservetransactions.
·[income]income,ismarkedupmostlyofinternationalinterestanddividendpaymentsandtheearningsofdomesticallyownedfirmsoperatingabroad.Wagesthatearnedabroadcanalsoentertheincomeaccount.
·[statisticaldiscrepancy]Dataabouttheoffsettingdebitandcredititemsassociatedwithagiventransactionmaybecollectedfromdifferentsourcesanddifferincoverage,accuracy,andtiming.Thebalanceofpaymentaccountsseldombalanceinpracticeastheymustintheory.Accountkeepersforcethetwosidestobalancebyaddingtotheaccountastatisticaldiscrepancy.
·[officialreservetransactions]Centralbanksoftenbuyorsellinternationalreservesinprivateassetmarketstoaffectexchangerateandmoneysupplyintheireconomies——officialforeignexchangeintervention.
Theofficialsettlementsbalanceorthebalanceofpaymentsisthesumofthecurrentaccountbalance,thecapitalaccountbalance,thenonreserveportionofthefinancialaccountbalance,andthestatisticaldiscrepancy.Itshowsthegaptheofficialreservetransactionsneedtocover.
Anegativebalanceofpayment(adeficit)maysignacrisis,foritmeansthatacountryisrunningdownitsinternationalreserveassetsorincurringdebtstoforeignmonetaryauthorities.
Chapter13
ExchangeRateandtheForeignExchangeMarket:
AnAssetApproach
*Exchangeratesareamongthemostimportantpricesinanopeneconomy.
*Anexchangerate,asthepriceofonecountry’smoneyintermsofanother’s,isalsoanassetprice.Toady’sdollar/euroexchangerate(E$/€)iscloselytiedtopeople’sexpectationsaboutthefuturelevelofthatrate(
),soexchangeraterespondimmediatelytoanynewsconcerningfuturecurrencyvalue.
§1.Exchangerateandinternationaltransactions
·Anexchangeratecanbequoteintwoways:
Inindirectterms:
thepriceofdollarsintermsoftheforeigncurrency.
122.87¥/$
Indirectterms:
thepriceoftheforeigncurrencyintermsofdollars.
0.008139$/¥
·Exchangerateplayancentralroleininternationaltradebecausetheyallowustocomparethepriceofgoodsandservicesproducedindifferentcountry.
eg:
asweater1000¥inTokyo80$inNewYork
(1000¥)/(120¥/$)=83.33$<80$
·Whenacountry’scurrencydepreciates,foreignersfindthatitsexportsarecheaperanddomesticresidentsfindthatimportfromabroadaremoreexpensive.
·Adepreciationlowertherelativepriceofacountry’sexportsandraisetherelativepriceofitsimports.
§2.Theforeignexchangemarket
1.Theactors
(1)Commercialbanks.
·Commercialbanksroutinelyentertheforeignexchangemarkettomeettheneedsoftheircustomers(primarilycorporations)——theexchangeofbankdepositsdenominatedindifferentcurrency.
·Commercialbanksareatthecenteroftheforeignexchangemarket:
——everysizableinternationaltransactioninvolvesthedebitingandcreditingofaccountsatcommercialbanksinvariousfinancialcenters.
——interbanktradingaccountsformostoftheactivityinforeignexchangemarket.
(2)Corporations
especially,corporationswithoperationsinseveralcountries.
(3)Nonbankfinancialinstitutions
suchasinsurancecorporations,pensionfunds,mutualaidedfunds.
(4)Centralbanks
whilethevolumeofcentralbanktransactionistypicallynotlarge,theimpactofthesetransactionmaybegreat.
2.Characteristicsofthemarket
·Theworldwidevolumeofforeignexchangetradingisenormous.
eg:
$1.9trillionperdayinApril2004,ofwhich$753billionweretradeddailyinLondon,$461billioninNewYork,and$199billioninTokyo.
·Directtelephone,fax,andInternetlinksamongthemajorforeignexchangetradingcentersmakeeachapartofasingleworldmarketonwhichthesunneversets.
Nosignificantdifferencebetweentheexchangeratequotedindifferentfinancialcenters,arbitrageopportunitiesarefew,smallandveryshort-lived.
·Thedollarisavehiclecurrency,mosttransactionsbetweenbanks(around90percentin2004)involveexchangesofforeigncurrencyforU.S.dollars.
3.Spotrates,Forwardrates,Foreignexchangeswap,FuturesandOptions
·[Spotrates]twopartiesagreetoanexchangeofbankdepositsandexecutethedealimmediately.
SettlementLags——thevaluedateforaspottransactionoccurstwobusinessdaysafterthedealismade.
·[Forwardrate]whenyouagreetosellpoundsfordollarsonafuturedateataforwardrateagreedontoday,youhave“soldpoundsforward”and“boughtdollarsforward”.
Thevaluedatemaybe30days,90days,180days,orevenseveralyears.
Forwardandspotexchangerates,whilenotnecessarilyequal,domovecloselytogether.
·[Foreignexchangeswap]aspotsaleofacurrencycombinedwithaforwardrepurchaseofthecurrency
·[Futures]whenyoubuyafuturecontract,youbuyapromisethataspecifiedamountofforeigncurrencywillbedeliveredonaspecifieddateinthefuture.
Thetimingandtermsoftheexchangeismoreflexible.
·[Options]Aforeignexchangeoptionsgivesitsownertherighttobuyorsellaspecifiedamountofforeigncurrencyataspecifiedpriceatanytimeuptoaspecifiedexpirationdate.
putoptions,calloption;optionscanbewrittenonmanyunderlyingassets.
§3.Thedemandforforeigncurrencyassets
1.Thedemandforassetsdependson:
·expectedrealrateofreturn
·riskandliquidity
Thereturnontwoassetscan’tbecomparedunlesstheyaremeasuredinthesameunit.
2.Thedemandfor
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