he206 tutorial 1 - student notes

8/13/2019 HE206 Tutorial 1 - Student Notes

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Tutorial 1Student notes


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1. National saving minus domestic investment equals the current account ( exports minus imports).

2. The current account equals the countrys net foreign investment, i.e., = .

the net flows of financial assets = net acquisition of financial asset net incurrence of financial liabilities, eg. If CA > 0 (credit (+)), domestic residents or CB bought more foreign assets than foreigners bought domestic assets (debit ( )) which is financial outflow when a payment or:

In terms of assets, net foreign assets = net acquisition of domestic residents of foreign assets net acquisition of foreign residents of domestic assets. Hence,

=

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3. The balance of payments accounts records flows of goods & services and ows o inancia assets across countries.

It has 3 parts: current account, capital account, and financial account (non reserve and reserve transactions), which balance each other.

Transactions of goods and services appear in the current account; transactions of financial assets appear in the financial account.

Each credit (+) has a corresponding debit ( ) and vice versa in the balance of paymen accoun

4. Official international reserve assets are a component of the financial account, which records official assets held by central banks.

5. The official settlements balance (which is also known in the media as the balance of payment) is the negative value of official international reserve assets, and it shows a central banks holdings of foreign assets

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.


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deficit of $1 billion and a non reserve financial .

a) What

was

the

balance

of

payment

of

Pecunia net foreign assets?


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Since non central bank financial inflows fell short of the current account deficit by $500 million, the balance of payments or official settlement balance of Pecunia(official settlements balance) was $500 million.

On page 343 of KOM, it states that the OSB or more informally, BOP, is the sum of the current account and the capital account less the non reserve portion of the financial account balance.

The country as a whole somehow had to finance its $1 billion current account deficit so Pecunias net forei n assets fell by $1 billion. Note that Current Account = net foreign investment = net foreign asset.


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.

buy nor sell Pecunia assets. How did the

in 2008? How would this official intervention

in Pecunia?


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,

in foreign reserves, which would appear as an

magnitude) in the countrys balance of .

In other words, the CB would have sold $500 m

receive an equivalent amount (official financial inflow which is credit).


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learned that foreign central banks had

2008? How would these official purchases


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the country needed only $1 billion to cover its current account deficit, but $1.1 billion flowed into the country (500 m on pr va e an m on rom ore gn cen ra an s .

Note that foreign central banks purchases of domestic assets do not necessarily affect the Official (international) reserve

Japan transactions in US dollars, third paragraph page 342

and

3rd

paragraph,

page

343). , comprising 500 in current account transactions, 500 million in private and 600 million in foreign central banks purchasing

(international) reserve transaction of the CB involves 100 million which is a purchase of foreign assets. Pecuniascentral banks urchase of forei n assets increases the official reserve assets.


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might be concerned about a large current

government be concerned about its official . .,

payments)?


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A current account deficit or surplus is a situation which may be unsustainable in the long run.

There are instances in which a deficit may be

productive capacity in order to have a higher national

income

tomorrow.

But

for

any

period

of

current

in which spending falls short of income (i.e., a current account surplus) in order to pay the debts incurred to

. In the absence of unusual investment opportunities,

the best path for an economy may be one in which , ,

time.


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The reserves of foreign currency held by a countrys central bank change with nonzero values of its official settlements balance. Central banks use their foreign currency reserves to influence exchange rates. A depletion of foreign reserves may limit the central banks ability to influence or peg the exchange rate.

, central bank reserves may an important as a way of allowing the economy to maintain consumption or

. level of reserves may also perform a signaling role by convincing potential foreign lenders that the country is

.

he206 tutorial 1 - student notes

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