mt2 - 1. Balance of Payments a. Know what makes up the...

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1. Balance of Payments a. Know what makes up the current account and capital account i. Current Account = Exports – Imports + Net Investment Income (Earned income on investments – interest payments to foreigners on domestic investments) – Debt Service Payments (interest and dividends paid on debts issued) + Net Remittances and Transfers (people working abroad and sending money home) ii. Positive number = surplus, Negative number = deficit iii. Capital Account (Financial Account) = Direct Private Investment (Foreign Direct Investment) + Foreign Loans (aid and loans from public or private sources) – Increase in foreign assets of domestic banking system – Resident capital outflow (capital flight; domestic money sent to foreign investment) iv. US has high current account deficit b. Understand how balance is achieved i. Comes from cash on hand; difference made up from cash balance ii. Cash balance + capital account + current account = zero iii. Always at zero using the Cash Account, or International Reserve Account, is the absolute value of the current v-account + capital account iv. Must use foreign reserves to pay the differences when Current Account and Capital Account are not equal to zero v. Limit imports, promote exports vi. Currency devaluation to achieve lower imports, more exports vii. Promote FDI viii. Decrease demand with structural adjustments contract economy 1. Increase r, slow spending, and decrease gov spending c. Be able to understand and calculate “basic transfer” i. Net capital inflows – interest payments; ii. Pinpointing the role of debt in balance of payments: basic transfer iii. F n = d * D iv. Net capital inflow = percentage rate of increase in debt * total accumulation of foreign debt v. Annual interest payments = r * D vi. Basic Transfer = dD – rD this means % increase in debt – interest rate *D 1. dD: increase in debt; rD: interest paid on debt 2. BT >0 then gaining foreign exchange, d > r 3. BT < then losing foreign exchange, d < r d. Know the trends in balance of payments in the developing countries in the last 30 years 2. The Debt Crisis a. Understand the events leading up to the debt crisis of the 1980s i. Rapid industrialization large current account deficits (imports were needed for capital and intermediate goods) ii. Capital account surpluses made up the difference 1. FDI, put loans from int’l banks, multilateral loans from IMF and World Bank, overall developing countries accumulated int’l reserves 2. In the 80s, current accounts were negative; fall in overall commodity prices, global recessions in 81-82, 91-93 contracted world trade, and increase in protectionism 3. Only positive recently due to large US trade deficit iii. 1. Resources flow annually from developed to developing iv. Most loans were from IMF, World Bank, regional development banks, (d high, low r) b. What were factors that set up the developing countries for disaster from 1974-1979? i.
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mt2 - 1. Balance of Payments a. Know what makes up the...

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