he206 tutorial 1 - student notes
TRANSCRIPT
-
8/13/2019 HE206 Tutorial 1 - Student Notes
1/12
Tutorial 1Student notes
-
8/13/2019 HE206 Tutorial 1 - Student Notes
2/12
1. National saving minus domestic investment equals the current account ( exports minus imports).
2. The current account equals the countrys net foreign investment, i.e., = .
the net flows of financial assets = net acquisition of financial asset net incurrence of financial liabilities, eg. If CA > 0 (credit (+)), domestic residents or CB bought more foreign assets than foreigners bought domestic assets (debit ( )) which is financial outflow when a payment or:
In terms of assets, net foreign assets = net acquisition of domestic residents of foreign assets net acquisition of foreign residents of domestic assets. Hence,
=
13 2
-
8/13/2019 HE206 Tutorial 1 - Student Notes
3/12
3. The balance of payments accounts records flows of goods & services and ows o inancia assets across countries.
It has 3 parts: current account, capital account, and financial account (non reserve and reserve transactions), which balance each other.
Transactions of goods and services appear in the current account; transactions of financial assets appear in the financial account.
Each credit (+) has a corresponding debit ( ) and vice versa in the balance of paymen accoun
4. Official international reserve assets are a component of the financial account, which records official assets held by central banks.
5. The official settlements balance (which is also known in the media as the balance of payment) is the negative value of official international reserve assets, and it shows a central banks holdings of foreign assets
13 3
.
-
8/13/2019 HE206 Tutorial 1 - Student Notes
4/12
deficit of $1 billion and a non reserve financial .
a) What
was
the
balance
of
payment
of
Pecunia net foreign assets?
-
8/13/2019 HE206 Tutorial 1 - Student Notes
5/12
Since non central bank financial inflows fell short of the current account deficit by $500 million, the balance of payments or official settlement balance of Pecunia(official settlements balance) was $500 million.
On page 343 of KOM, it states that the OSB or more informally, BOP, is the sum of the current account and the capital account less the non reserve portion of the financial account balance.
The country as a whole somehow had to finance its $1 billion current account deficit so Pecunias net forei n assets fell by $1 billion. Note that Current Account = net foreign investment = net foreign asset.
-
8/13/2019 HE206 Tutorial 1 - Student Notes
6/12
.
buy nor sell Pecunia assets. How did the
in 2008? How would this official intervention
in Pecunia?
-
8/13/2019 HE206 Tutorial 1 - Student Notes
7/12
,
in foreign reserves, which would appear as an
magnitude) in the countrys balance of .
In other words, the CB would have sold $500 m
receive an equivalent amount (official financial inflow which is credit).
-
8/13/2019 HE206 Tutorial 1 - Student Notes
8/12
learned that foreign central banks had
2008? How would these official purchases
-
8/13/2019 HE206 Tutorial 1 - Student Notes
9/12
the country needed only $1 billion to cover its current account deficit, but $1.1 billion flowed into the country (500 m on pr va e an m on rom ore gn cen ra an s .
Note that foreign central banks purchases of domestic assets do not necessarily affect the Official (international) reserve
Japan transactions in US dollars, third paragraph page 342
and
3rd
paragraph,
page
343). , comprising 500 in current account transactions, 500 million in private and 600 million in foreign central banks purchasing
(international) reserve transaction of the CB involves 100 million which is a purchase of foreign assets. Pecuniascentral banks urchase of forei n assets increases the official reserve assets.
-
8/13/2019 HE206 Tutorial 1 - Student Notes
10/12
might be concerned about a large current
government be concerned about its official . .,
payments)?
-
8/13/2019 HE206 Tutorial 1 - Student Notes
11/12
A current account deficit or surplus is a situation which may be unsustainable in the long run.
There are instances in which a deficit may be
productive capacity in order to have a higher national
income
tomorrow.
But
for
any
period
of
current
in which spending falls short of income (i.e., a current account surplus) in order to pay the debts incurred to
. In the absence of unusual investment opportunities,
the best path for an economy may be one in which , ,
time.
-
8/13/2019 HE206 Tutorial 1 - Student Notes
12/12
The reserves of foreign currency held by a countrys central bank change with nonzero values of its official settlements balance. Central banks use their foreign currency reserves to influence exchange rates. A depletion of foreign reserves may limit the central banks ability to influence or peg the exchange rate.
, central bank reserves may an important as a way of allowing the economy to maintain consumption or
. level of reserves may also perform a signaling role by convincing potential foreign lenders that the country is
.