Balance of payement for the county

8/6/2019 Balance of payement for the county

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TERM PAPER

OF

INTERNATIONAL FINANCIAL

MANAGEMENT

Topic:Based on historical data from BEA (www.bea.doc.gov), what is therelationship US trade balances and the value of the US dollar.

SUBMITTED TO: SUBMITTED BY:

Mr.Sachin Lal Kashyup Preeti Bisht

RT1902-A16

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ACKNOWLEDGEMENT

Accomplishment of any task, howsoever small it may be, is

Not possible without the blessings of the Almighty and without the active

Help of certain individuals.

My special thanks to Mr. Sachin Lal Kashyup, Who motivated me to take up this Term paper.

Im highly grateful to him for guiding me so affectionately.

And last, but not the least, Im indebted to teachers

For their help, moral support. I hope and wish; I can repay their efforts half as much as they have

effort for me.

- Preeti Bisht

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INTRODUCTION

A balance of payment is a double entry system of record of all economic transactions between

the resident of the country and the rest of the world carried out in a specific period of time.

Balance Of Payments Statement presents classified record of:

All recipient on account of goods exported

Services rendered

Capital received by residents

Payments made by the residents due to goods imported and services received from

Capital transferred to non-residents/foreigners.

The IMP publication on, Balance of Payments Manual, describes the concept of balance

of payments as:

The balance of payments is a statistical statement for a given period showing:

Transaction in goods and services and income between an economy and the rest of the

world.

Changes of ownership and other changes in that countrys monetary gold, SDRs, andclaims on and liabilities to rest of the world, and unrequited transfers and counterpart

entries that are needed to balance, in the accounting sense, any entries for the forgoing

transactions and changes which are not naturally offsetting.

Balance of Trade

The balance of trade is a narrow term. It takes into account only merchandise export s and

imports. Thus, balance of trade takes into account only the transactions arising out of the exportand import of visible items. In other words, balance of trade does not take into account the

exchange of invisible items like services of banking sectors, insurance sectors, transport sectors,

tourism industry, and dividend payments and receipt.

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COMPONENTS OF BALANCE OF TRADE

As indicated earlier, these are several items in balance of payments. These items can be

classified as hereunder:

Current Account

Capital Account

Unilateral Payment Account

Official Settlement Account.

CURRENT ACCOUNT:

Items under current account:

Credits Debits

1. Merchandise Exports(Sales Of Goods)2. Invisible Exports(Sales of Services) Transport services sold abroad Insurance services sold abroad Foreign tourists expenditure in the

country Other services sold abroad Incomes received on loans and

investments abroad

1. Merchandise Imports(Purchase ofGoods)

2. Invisible imports(Purchase ofServices)

Transport services purchased from

abroad Insurance services purchased from

abroad Tourists expenditure abroad Other services purchased from abroad Income paid on loans and investments

in the home country

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CAPITAL ACCOUNT:

Items under capital account:

Capital Account Credits Capital Account Debits

1. Foreign long-term investments inhome country(less redemptions andrepayments)

Direct investments in the homecountry

Foreign investments in home country Other investments of foreigners in

home country Foreign Governments loans to the

home country

1. Foreign short-term investments inthe home country.

Unilateral Transfer Account

1. Private remittances received

from abroad

2. Pension payments received

from abroad

2. Government grants received fromabroad

Official Settlements Accounts

1. Official sales of foreign

1. Long-term investments

abroad(less

redemptions and repayments)

Direct investments abroad

Investments in foreign securities Other investments abroad

Governments loans to the Foreigncountry

2 Short-term investments

abroad.

Unilateral Transfer Account

1. Private remittances abroad

2. Pension payments abroad

3.Government grants abroad

Official Settlements Accounts

1. Official purchases of foreign

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currencies or other reserves

assets abroad.

currencies or other service

assets.

UNILATERAL TRANSFER ACCOUNT

Unilateral transfers are giving the gifts. These include government grants, reparations, private

remittances, disaster relief etc. Singapore gave grant to Uganda in 1998. This item would be on

the debit side of Singapores balance of payments and credit side of Ugandas balance of

payment.

OFFICIAL TRANSFER ACCOUNT

Official settlements account represents the official sales of foreign currencies and other reserves

to foreign countries or official purchase of foreign currencies or other reserves from foreign

countries.

DISEQUILIBRIA IN BOP

BOP position is considered favourable , when receipts from foreigners, exceed payments

made to them and unfavourable when payments exceeds receipts.

Disequilibria is caused by random variations in trade, fluctuations in production of

primary goods resulting in unusual trade in such commodities and are generally

temporary in nature.

Disequilibria in BOP can also occur as a result of:

Technological improvements affecting quality & prices of some products, in

certain parts of the world, resulting in altering pattern of trade.

State of economic development of a nation.

Drastic change in consumer tastes, as a result of improvements in communication

technologies, information system etc.

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Changes in income level of the people of the nation, as a result of high growth

rates, leading to a different level of consumption pattern &higher imports.

Inflation, thereby increasing the cost of output of a country, also results in

reduction in exports.

ECONOMIC FACTOR

POPULATION

In this time of sluggish growth, Singapore's economy continues to grow at a 6.8 percent clip.

The size of the Singapore economy is projected to outstrip Germany's by 2025, and if present

trends continue, Singapore will be the third largest economy in the world by 2035, lagging only

the United States and China. Because of the combination of rapid growth and an expanding

population, economists regard Singapore as an emerging economic global superpower. Thanks

to rapid growth and a young, growing population, Singapore is an emerging economic

superpower.

DEMOGRAPHICS

According to research from Goldman Sachs, Singapore will add more than 310 million people to

its population between 2000 and 2030--effectively creating another United States.

SAVINGS RATE

Singapore has one of the highest personal savings rates in the world at 36 percent. While this

bodes well for Singaporean economic security in the long run, it causes short-term problems

because of the lack of domestic spending.

POVERTY

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More than 40 percent of the population lives below the poverty line. The World Bank estimates

that a third of the world's poor now live in Singapore.

CORRUPTION

A 2005 survey from Transparency International found that half of Singaporens surveyed had a

personal experience in the bribery of public officials.

DETERMINANTS OF POSITIVE OR NEGATIVE BOP

a. Interest rates (short run).

b. Inflation (long run, PPP theory).

c. Monetary Policy.

d. Central Bank Intervention and CB announcements.

e. Capital Flows (short run if portfolio movement).

f. Expected changes in real output.

g. Current Account influence.

h. Stock market fluctuations.

i. Macro leading indicators and macro fundamentals.

j. Fiscal Policy.

k. Political events.

l. Contagion.

m. Consumer Demand.

n. Strong sterling exchange rate.

o. Weakness of the global economy.

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RELATIONSHIP B/W BOP & CURRENCY

When we do not make ends meet we become less credit-worthy, our currency weakens and so

does its purchasing power. It buys less and prices increase.

As our currency weakens (devalues) so our exports become cheaper abroad but we have to pay

more for imports. This reduces our standard of living relative to others abroad as they find our

produce cheaper while we find theres more expensive.

We now have to produce and sell a greater volume of exports so as to earn as much foreign

currency as we did before and have to sell even more if we are to improve our position, if we are

to benefit from a devaluating currency. Considering competitiveness abroad, we have seen that

our export prices can rise to the extent that increasing prices are not absorbed internally by alowering of the standard of living of some or all of the population.

Hence we become less competitive and may then have to devalue or allow the exchange rate to

adjust itself so as to stay competitive in the short term and to become more competitive in the

long term. In this way we reduce our prices abroad and become more competitive but as we now

get paid less for each item sold we must now sell more items so as to earn as much as we did

before.

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American-Canada Trade and Exchange Analysis

Canada is by far the largest trading partner of the United States, as the U.S.-Canadian

relationship accounts for 20% of all U.S. international trade. If we are going to figure out why

the United States still has a large trade deficit, this would be a good place to start.

The American Dollar has depreciated rapidly relative to the Canadian Dollar. In October 2011,

the next October, a U.S. Dollar would only fetch $1.002. However the balance of trade remained

steady over this period, with a trade deficit of $4.3 billion in October 2009 and $4.9 billion in

October 2010. We would expect the balance of trade to improve over this period, not get worse!

The correlation between the exchange rate and the trade deficit was -0.574 for this period. We

expect that when the exchange rate goes down, the trade should go up. However a negative

correlation between the two indicates that when the exchange rate went down, the trade deficit

became larger. So the data does not at all match our expectations.

American-Canadian Trade and Exchange Data

End Date USD/CAD CDN DEF

30-Jun-09 1.124 -4907.4

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31-Jul-09 1.1286 -5264.5

31-Aug-09 1.0863 -4848.2

30-Sep-09 1.0822 -5038.9

31-Oct-09 1.0542 -3669

30-Nov-09 1.0624 -3847

31-Dec-09 1.0557 -3810

31-Jan-10 1.0436 -5148

28-Feb-10 1.056 -4345

31-Mar-10 1.0244 -4950

30-Apr-10 1.0053 -4071.2

31-May-10 1.0395 -3776.6

30-Jun-10 1.0378 -4341.7

31-Jul-10 1.0447 -4527.6

31-Aug-10 1.0388 -4030.2

30-Sep-10 1.0346 -4303.6

31-Oct-10 1.0181 -3222.5

30-Nov-10 1.0121 -4207.3

31-Dec-10 1.009 -4072.3

31-Jan-11 0.9939 -3527.1

28-Feb-11 0.9878 -3811.3

31-Mar-11 0.9768 -4273.6

American-Mexican Trade and Exchange Analysis

Largely due to geography, Mexico is the United States second largest trading partner, with the

U.S.-Canadian relationship accounting for almost 12% of all U.S. international trade.

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Although the U.S. Dollar has been weak against the Canadian Dollar and the Euro, it has actually

appreciated against the Mexican Peso. One American Dollar bought just over 12 Mexican Pesos

at the beginning of 2011; by October 2010 it bought over 13, an increase of 22%. The trade

deficit has risen from 2.2 billion to 3.5 billion U.S. Dollars during this period, an increase of

57%. The correlation between changes in the Mexican-American exchange rate and the

Mexican-American trade deficit for this period was -0.52, indicating that when the Dollar rose in

value (relative to the peso) that the American trade balance fell. Jumps in the U.S. Dollar relative

to the Mexican Peso occured at the same time as increases in the U.S. trade deficit with Mexico,

which is what we would expect.

While the Canadian-American data explained little, the Mexican-American data gives some

explanation to why the U.S. trade deficit remains so large. For a more complete picture, we'll

need to look at the trade relationships the United States has with Japan and China.

American-Mexican Trade and Exchange Data

End Date USD/MXN MXN DEF

30-Jun-09 13.317 -3526.6

31-Jul-09 13.348 -3271

31-Aug-09 12.997 -3404.1

30-Sep-09 13.386 -3218.9

31-Oct-09 13.244 -3423.4

30-Nov-09 13.112 -3422.2

31-Dec-09 12.823 -3344.2

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31-Jan-10 12.837 -3924.2

28-Feb-10 12.937 -3900.3

31-Mar-10 12.577 -3017

30-Apr-10 12.237 -2793.9

31-May-10 12.706 -2877.4

30-Jun-10 12.716 -3437.1

31-Jul-10 12.828 -3126.4

31-Aug-10 12.741 -3294.6

30-Sep-10 12.821 -3329.8

31-Oct-10 12.43 -3223.4

30-Nov-10 12.308 -3398.2

31-Dec-10 12.382 -3213.8

31-Jan-11 12.136 -3430.7

28-Feb-11 12.049 -2772.7

31-Mar-11 11.995 -2247.9

American-Japanese Trade and Exchange Analysis

Japan and China each account for around 9% of U.S. international trade. Americans have

historically had a large trade deficit with Japan, as American consumers highly value many

Japanese electronic products.

The U.S. Dollar has depreciated significantly against the Japanese Yen for the last 2 years, with

1 U.S. Dollar buying 132 yen at the beginning of 2002 but only 109 yen in October 2003, a drop

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of 17.5%. During this time the trade deficit has become larger, with the third largest trade deficit

in the last 22 months occuring in the last month of the sample. Interestingly

the correlation between movements in the exchange rates and movements in the trade balance is

-.20, indicating that there is no relationship between changes in the two. I'm not sure what this

data is telling us.

American-Japanese Trade and Exchange Data

End Date USD/JPY JPN DEF

31-Mar-11 81.61 -4729.2

28-Feb-11 82.59 -5564.3

31-Jan-11 82.49 -5722.7

31-Dec-10 83.36 -6798.5

30-Nov-10 82.43 -4905.3

31-Oct-10 81.84 -5420.7

30-Sep-10 84.45 -5737.4

31-Aug-10 85.53 -5290.3

31-Jul-10 87.59 -5935.7

30-Jun-10 90.94 -6410.4

31-May-10 92.02 -6403.4

30-Apr-10 93.42 -7061.5

31-Mar-10 90.57 -5220.3

28-Feb-10 90.14 -5315.8

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high degree of complementarily between the two countries. China's currency exchange rate was

not to blame for the US trade deficit, he said.

American-Chinese Trade and Exchange Data

End Date USD/CNY CHN DEF

7-Jun-09 6.8205-6846.10

5-Jul-09 6.8228 -6491.30

2-Aug-09 6.8206 -5638.50

6-Sep-09 6.8208 -7553.10

4-Oct-09 6.8172 -8073.00

1-Nov-09 6.8174 -8521.30

6-Dec-09 6.8184-9365.20

3-Jan-10 6.8202 -10831.60

7-Feb-10 6.8186 -10267.80

7-Mar-10 6.8162 -9492.30

4-Apr-10 6.8179 -10408.80

2-May-10 6.8179 -9575.90

6-Jun-10 6.8209 -9421.30

4-Jul-10 6.7748 -7579.40

1-Aug-10 6.7701 -7669.60

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5-Sep-10 6.7948 -9451.40

3-Oct-10 6.6842 -9861.90

7-Nov-10 6.6605 -9989.50

5-Dec-10 6.6537 -11338.50

2-Jan-11 6.6075 -11699.00

6-Feb-11 6.565 -12691.80

6-Mar-11 6.5612 -13565.50

REFERENCE

http://economics.about.com/cs/analysis/a/trade_deficit.htm

http://www.foreign-trade.com/xchange.htm

http://www.investopedia.com/university/releases/tradebalance.asp

http://www.globalization101.org/uploads/File/Trade/tradeall2010.pdf

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http://economics.about.com/cs/analysis/a/trade_deficit.htmhttp://www.foreign-trade.com/xchange.htmhttp://www.investopedia.com/university/releases/tradebalance.asphttp://www.globalization101.org/uploads/File/Trade/tradeall2010.pdfhttp://economics.about.com/cs/analysis/a/trade_deficit.htmhttp://www.foreign-trade.com/xchange.htmhttp://www.investopedia.com/university/releases/tradebalance.asphttp://www.globalization101.org/uploads/File/Trade/tradeall2010.pdf

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Balance of payement for the county