CH13 Balance of Payments, Debt, Stabilisation &

CH13 Balance of Payments, Debt, Stabilisation & -...

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Cht 13. Balance of Payments, Debt, Stabilisation & Development Country’s international financial situation as reflected in its balance of payments and level of monetary reserves depends not only on its current account (commodity trade) balance but also on its balance on capital account (net inflow or outflow of private and public financial resources). The Balance of Payments Account: General Considerations Balance of payments (BOP): the extension of our analysis beyond simple merchandise trade into area related to the international flow of financial resources permits us to examine the BOP of developing country –Current Account: export and import of goods and services, investment income, debt-service and private and public net remittances and transfers. It subtracts the value of imports from exports and then adds flows of the net investment income received from abroad. –Capital Account-financial account: records the value of private foreign direct investment, foreign loans by private international banks, and loans and grants from foreign government and multilateral agencies such as the IMF and work bank. Inflow Outflow Amortisation (gradual reduction) Cash Account or International Reserve Account (Balancing item) official monetary reserves consist three forms: -foreign currency (mostly US $, emo)-gold-special drawing rights at the IMF. International reserve: serve for countries the same purpose that bank accounts serve for individuals. They can be drawn on to pay bills and debts, they are increased with deposits representing net export sales and capital inflows and they can be used as collateral to borrow additional reserves. Trends in LDC Balance of Payments During the 1980, the LDC experienced an extraordinarily difficult period in their BOP account (current and capital account) with the rest of the world. There are 5 reason for the decline in current balances : 1)a dramatic fall in commodity prices including oil. 2) Global recessions (1981-82, 1991-93) which caused a contraction in world trade. 3) Increasing protectionism in the developed world against LDC export. 4) overvalued exchange rates, particularly among certain Asian exporter. Financing and Reducing Payments Deficits Some initial policy issues: facing existing or projected balance of payments deficits on combined current and capital accounts, developing nations have a variety of policy options.
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1)Restrictive fiscal and monetary policies: can seek to improve the balance on current account by promoting export expansion or limiting imports. Countries can seek to achieve both objectives simultaneously by altering their
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This note was uploaded on 11/02/2010 for the course ECOS 3002 taught by Professor Dulip during the Three '10 term at University of Sydney.

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CH13 Balance of Payments, Debt, Stabilisation & -...

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