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CH 11: Balance of payments, Balance of payments, Balance of trade (in…

- - - - the visible trade account (goods balance)
        
        records the imports and exports of goods (visible)
        e.g. an excess of exports of goods over imports of goods results in a balance of trade surplus
      - the invisible trade account (services balance)
        
        records the trade in services between countries (invisible)
        
        the difference between the value of exports and imports of services (such as shipping, aviation, banking, insurance, tourism, communications and government military expenditure overseas)
      - net income flows from abroad (primary income)
        
        consists of labour income (of resident households received from non-resident employers or paid by resident employers to non-resident workers)
        e.g. rent, interest, profits and dividends received from or paid to the rest of the world
      - net transfers (secondary income)
        
        comprises transfers of money from one country to another that do not involve the exchange of goods and services or transfer of ownership of fixed assets
        e.g. government grants to other countries, aid, gov's contribution to international organisations
        e.g. a domestic foreign worker in Singapore sending money back to her home country is recorded as a debit transfer
    - - capital account
        
        consists of capital transfers and acquisition or disposal of non-produced, non-financial assets
        e.g. debt forgiveness, transfer of ownership of fixed assets, transfer of cash linked to the acquisition and disposal of fixed assets
        
        acquisition or disposal of non-produced, non-financial assets including tangible assets (lands) and intangible assets (e.g. patents, copyrights, trademarks)
      - financial account
        
        records international investments and transactions in financial assets and liabilities, both short-term and long-term
        
        capital outflow, resulting in an increase in net assets abroad (e.g. Singapore residents invest in China) is recorded as a credit (+)
        capital inflow, resulting in an increase in liabilities to foreigners (e.g. US firm investing in an enterprise in Singapore) is recorded as a debit (-)
        
        a) short-term capital (financial) flows
        
        includes band deposits, trade credits and bank loans
        For e.g. a resident in one country may decide to put his money in a foreign currency deposit in a foreign bank which offers higher interest rate, due to its short-term nature of such funds, they are also known as hot money
        
        b) long-term capital (financial) flows
        
        records long term capital investment and loans (with maturity of one year or more)
        1. FDI foreign direct investment: cross-border investment associated with a resident in one country having control or a significant degree of influence on the management of an enterprise that is resident in another country.
        
        can be a new factory set u in the country by a foreign firm, can be foreign firms buying over an existing company in the country
        
        a country’s investment overseas represents an increase in assets abroad ad is thus a credit item, investment by other country in the country represents an increase in liabilities to foreigners and is thus recorded as a debit item in the financial account
        
        Portfolio investment: includes, in addition to equity securities (stocks and shares) and debt securities in the form of bonds and notes, money market instrument and financial derivatives such as stock options.
        
        when residents buy foreign securities there is an increase in asset and is thus a credit item, when non-residents buy securities issued by the country, it is recorded as a debit item in the country’s financial account
- - - - Economic recession
        
        lack of competitiveness of exports
        
        fall in AD
        
        contractionary effect on economy
        
        economic recession and unemployment
        
        lack of competitiveness also indicate a low inefficiency in production and wastage of resources
        
        producers see a reduction in profitability and decide to decrease investment
      - depletion of official reserves
        
        persistent BOT deficit - BOP deficit
        
        need to be balanced and financed by drawing down the economy’s foreign exchange reserves
        
        living beyond its mean and its reserves may run out one day
        
        may eventually devalue or allows the depreciation of their currency
    - - devaluation of exchange rate and loss of production
        
        devaluation will cause the investors to lose confidence in the value of the contry’s currency and resulting in possibly a panic selling of the country’s currency, which destroy the external value of the currency
        
        massive capital outflow from the country and worsening the overall balance and lowering investment
      - increased foreign debt burden
        
        need to rely on borrowing to finance deficit
        
        increases the foreign or external debt of the country and result in a growing foreign debt which is increasingly difficult to pay