ch206 - 20.1 FINANCING INTERNATIONAL TRADE Capital account...

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Cobbe ECO2013 Fall 03 Chapter 20 Page 1 of 9 < When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe a countries balance of payments accounts and explain what determines the amount of international borrowing and lending. 1 Explain how the exchange rate is determined and why it fluctuates. 2 20.1 FINANCING INTERNATIONAL TRADE < Balance of Payment Accounts Balance of payments The accounts in which a nation records all transactions that cross borders, including its international trading, borrowing, and lending. Based on payments : if the payment comes IN , recorded as positive ; if the payment goes OUT , recorded as negative . Current account Record of international receipts and payments that do not involve exchange of assets or liabilities — current account balance equals exports minus imports, plus net factor income [interest etc] and transfers received from abroad. 20.1 FINANCING INTERNATIONAL TRADE Capital account Record of all transactions involving change of ownership of assets or liabilities; includes foreign lending and borrowing, and foreign investment in the United States minus U.S. investment abroad. Official settlements account Record of the change in U.S. official reserves. U.S. official reserves The government’s holdings of gold, foreign currency , and Special Drawing Rights [IMF ‘fiat money’]. 20.1 FINANCING INTERNATIONAL TRADE 20.1 FINANCING INTERNATIONAL TRADE
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Cobbe ECO2013 Fall 03 Chapter 20 Page 2 of 9 20.1 FINANCING INTERNATIONAL TRADE 20.1 FINANCING INTERNATIONAL TRADE Silly Individual Analogy An individual’s current account records the income from supplying the services of factors of production and the expenditures on goods and services. An example: In 2000, Joanne Worked and earned labor income of $25,000. Had investments that paid interest and dividends of $1,000. Her labor income of $25,000 is analogous to a country’s current exports. Her $1,000 of interest and dividends is analogous to a country’s factor incomefrom abroad. 20.1 FINANCING INTERNATIONAL TRADE Joanne: Spent $18,000 buying goods and services to consume. Her consumption expenditure is analogous to a country’s imports. Her current account balance was $26,000 – $18,000, a surplus of $8,000. But she did something else, namely she Bought a house, which cost her $60,000. This was acquiring an asset, so it is analogous to investment abroad – an outlay [negative entry] in the capital account. For a country, balance on current account plus balance on capital account equals change in official reserves. Is this true for Joanne? 20.1 FINANCING INTERNATIONAL TRADE To pay for the $60,000 house, Joanne borrowed $50,000 from the bank, used the $8,000 surplus on her current account, and used $2,000 that she had in her bank account. Joanne’s borrowing is analogous to a country’s
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ch206 - 20.1 FINANCING INTERNATIONAL TRADE Capital account...

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