International EconomicsInternational EconomicsMordecai E. KreininMordecai E. Kreinin
Copyright ©2002 South-Western/Thomson Learning.All rights reserved.
Copyright ©2002 South-Western/Thomson Learning.All rights reserved.
Part IIInternational Financial Relations
Part IIInternational Financial Relations
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CHAPTER 13CHAPTER 13
Domestic Policies to Adjust the Balance of
Payments
Domestic Policies to Adjust the Balance of
Payments
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OVERVIEWOVERVIEW
“Automatic” Processes
Summary of the “Automatic” Balance-of-Payments Adjustment
Government Policy
Foreign Repercussions
The Balance of Payments in the Context of General Policy Objectives
Some Unanswered Questions
“Automatic” Processes
Summary of the “Automatic” Balance-of-Payments Adjustment
Government Policy
Foreign Repercussions
The Balance of Payments in the Context of General Policy Objectives
Some Unanswered Questions
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Important ConceptsImportant Concepts Marginal propensity to
consume
Marginal propensity to save
Marginal propensity to import
Multiplier
Foreign trade multiplier
Specie-flow mechanism
Velocity (V)
Demand elasticity
Automatic adjustment mechanism
Monetary policy
Fiscal policy
IMF conditionality
Expenditures-changing policies
Portfolio capital
Portfolio approach
Locomotive country
Foreign repercussions
Consistent situation
Inconsistent situation
Degree of impact
Time lags
Incompatible trinity
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“Automatic” Processes“Automatic” Processes The Monetary Mechanism Imbalance and Money Supply Add Direct Effect on Private Expenditures
Income changes Price changes MPC, MPS, MPM The multiplier X and GDP
Additional Insights: The specie-flow mechanism The equation of exchange Keynesian Position
The Monetary Mechanism Imbalance and Money Supply Add Direct Effect on Private Expenditures
Income changes Price changes MPC, MPS, MPM The multiplier X and GDP
Additional Insights: The specie-flow mechanism The equation of exchange Keynesian Position
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Additional Insights:The Foreign Trade MultiplierAdditional Insights:The Foreign Trade Multiplier
Marginal propensity to consume
Marginal propensity to save
Marginal propensity to import
Income and Price Mechanisms
Trade and the national economy
Marginal propensity to consume
Marginal propensity to save
Marginal propensity to import
Income and Price Mechanisms
Trade and the national economy
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Summary of the “Automatic” Balance-of-Payments AdjustmentSummary of the “Automatic” Balance-of-Payments Adjustment
Automatic adjustment mechanism under fixed exchange rates, a function of aggregate expenditures, money supply—operating in same direction, affecting economy through income and price mechanism
Automatic adjustment mechanism under fixed exchange rates, a function of aggregate expenditures, money supply—operating in same direction, affecting economy through income and price mechanism
The Four Linkages Involved in Automatic Adjustment Mechanism Under Fixed
Exchange Rates
The Four Linkages Involved in Automatic Adjustment Mechanism Under Fixed
Exchange Rates
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Summary of the “Automatic” Balance-of-Payments AdjustmentSummary of the “Automatic” Balance-of-Payments Adjustment
Deficit vs. surplus in balance of payments
Marginal propensity to import
Improved competitive position and price elasticity
Money supply mechanism, sterilization
Surplus, deficit contain seeds of reversal
Under fixed exchange rate, income and price influence balance of payments in corrective direction
Under floating exchange rate, above applies to current account
Deficit vs. surplus in balance of payments
Marginal propensity to import
Improved competitive position and price elasticity
Money supply mechanism, sterilization
Surplus, deficit contain seeds of reversal
Under fixed exchange rate, income and price influence balance of payments in corrective direction
Under floating exchange rate, above applies to current account
Automatic Processes that Reverse External Imbalance under a Stable Exchange Rate
Automatic Processes that Reverse External Imbalance under a Stable Exchange Rate
FIGURE 13.1FIGURE 13.1
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Government PolicyGovernment Policy
Domestic Policy Measures and the Current Account Expenditure-changing policies
Effect on Direct Investment Capital Effect on Other Capital Movements
Portfolio capital Portfolio approach Monetary and fiscal policies Monetary contraction
Domestic Policy Measures and the Current Account Expenditure-changing policies
Effect on Direct Investment Capital Effect on Other Capital Movements
Portfolio capital Portfolio approach Monetary and fiscal policies Monetary contraction
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Foreign RepercussionsForeign Repercussions
Leading industrial nation has additional responsibility for fate of other countries
To calculate foreign trade multiplier effect of any policy, foreign repercussions must complete circuit and affect policy-originating country
No country completely free to pursue independent domestic policies
Coordinated reduction of interest rates
Giving up fixed exchange rates or independent monetary policy
Leading industrial nation has additional responsibility for fate of other countries
To calculate foreign trade multiplier effect of any policy, foreign repercussions must complete circuit and affect policy-originating country
No country completely free to pursue independent domestic policies
Coordinated reduction of interest rates
Giving up fixed exchange rates or independent monetary policy
Foreign repercussions can be shown schematically for a two-country world, where country A experiences an autonomous increase in its exports to country B:
Foreign repercussions can be shown schematically for a two-country world, where country A experiences an autonomous increase in its exports to country B:
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Country A Country B
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The Balance of Payments in the Context of General Policy ObjectivesThe Balance of Payments in the Context of General Policy Objectives
Consistent situations
Inconsistent situations
Internal balance, external balance
Relationship of balance of payments to other economic goals
Consistent situations
Inconsistent situations
Internal balance, external balance
Relationship of balance of payments to other economic goals
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Some Unanswered QuestionsSome Unanswered Questions
Degree of Impact
Economic estimation
Time Lags
Degree of Impact
Economic estimation
Time Lags
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SummarySummary Domestic policies to restore balance of payments
under fixed exchange regime Application to current account under flexible rate
regime Multiplier effect Deficits, surpluses Automatic mechanisms provide partial remedies Fiscal and monetary measures, expansionary
policies Consistent and inconsistent situations
A Hypothetical Import FunctionBased on Table A13-1.1
A Hypothetical Import FunctionBased on Table A13-1.1
FIGURE A13-1.1FIGURE A13-1.1
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Derivation of Total Injection
andTotal
Leakage Functions
Derivation of Total Injection
andTotal
Leakage Functions
FIGURE A13-1.3FIGURE A13-1.3
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Equilibrium Output (YE)Occurs Where (S + M) = (I + X);
Capital-Exporting Country (such as Japan)
Equilibrium Output (YE)Occurs Where (S + M) = (I + X);
Capital-Exporting Country (such as Japan)
FIGURE A13-1.4FIGURE A13-1.4
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A Capital-Importing Country(such as The United States):
I >S and M > X; (I – S) = (M – X)
A Capital-Importing Country(such as The United States):
I >S and M > X; (I – S) = (M – X)
FIGURE A13-1.5FIGURE A13-1.5
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