International Economics 2

Assoc. Prof. Dr. Ngo Thi Tuyet Mai

School of Trade and International Economics, NEU

Tel. 0904324282

[email protected]
[email protected]
 INTRODUCTION
 Introduction to the Syllabus
 What is International
Economics about?
 Why it is important to study
international economics?
 Textbook & Reference Books
 Textbook: Dominick Salvatore (2016). International
Economics. 12th edition, John Wiley & Sons, Inc.
 Reference books:
 Do Duc Binh & Ngo Thi Tuyet Mai (đồng chủ biên) (2019), International
Economics, National Economic University, Vietnamese version.
 Paul R.Krugman, Maurice Obsfeld, Marc Melitz (2018). International
Economics: Theory and Policy (11th edition). Prentice Hall.
 Thomas Pugel (2016). International Economics. 16th edition. McGraw-Hill
Course requirement & expectation
 Grading:
• Attendance: 10%
• Quizzes: 20%
• Group assignments: 20%
• Final exam : 50%
 Bonus Points:
• may be given to students actively participating in
class discussions
Quizzes

 2 quizzes
 Time limit: 30 minutes
 Each quiz consists of multi-choice,
true/false questions, and short answers
 Quiz 1: Week 6
 Quiz 2: Week 11
 The two best marks will be worth 10 per
cent each towards the final grade.
Group Assignments (1)

 A groups of 5-7 students

 Each group will discuss two pre-assigned topics:
 MAKE a presentation and GIVE answers
 REVIEW and ADD comments to other group discussion
 Submit a draft outline of how the
presentation will be organized to the
instructor TWO WEEKS before the
presentation (week 4; week 9)
Introduction to International
Economics
 What is International Economics?
 is the study of economic interactions between
countries.
 States/Nations
 Sovereign States/Nations
 Recognized Stages/Nations
Introduction to International
Economics
 The course is divided into two parts:
 International Trade (International
Economics 1)

 International Finance (International

Economics 2)
International Economics 2: Contents

 Chapter 1 (Text-13)- Balance of Payments

 Chapter 2 (Text-14)– Foreign Exchange Markets
and Exchange Rates
 Chapter 3 (Text-15)– Exchange Rate
Determination
 Chapter 4 (Text-16)– The Price Adjustment
Mechanism with Flexible and Fixed Exchange
Rates
 Chapter 5 (Text-17)– The Income Adjustment
Mechanism and Synthesis of Automatic
Contents (9 chapters)
 Chapter 6 (Text-18)– Open – Economy
Macroeconomics: Adjustment Policies
 Chapter 7 (Text-19)– Prices and Outputs in an
Open Economy: Aggregate Demand and
Aggregate Supply
 Chapter 8 (Text-20)– Flexible versus Fixed
Exchange Rate, the European Monetary System,
and Macroeconomic Policy Coordination
 Chapter 9 (Text-21)– International Monetary
System: Past, Present, and Future
CHAPTER ONE

1 International
Economics
Twelve Edition

BALANCE O PAYMENTS

Dominick Salvatore (2016), International Economics, 12th edition, John Wiley & Sons, Inc.
 In this chapter:
Learning Goals: After reading this chapter, you should be
able to:
 Understand what the balance of
payment (BOP) is and what it measures
 Importance of BOP
 Describe the change in the US/Vietnam
BOP over the years

12
BOP – Contents
 Introduction
 Accounting principles
 Structure
 Accounting balances & BOP
 The Vietnam BOP

13
 BOP - Introduction

Balance of payments:
 A record of the international transactions
 Between the residents of one country and the rest
of the world
 During a period of time, usually a calendar
year.
 IMF:
 BPM 6

14
 BOP – Introduction (cont’d)
 International transactions
 Exchanges of goods, services or assets
 Between the residents of one nation and the residents of another.
 Residents:
 Businesses, individuals and government agencies
 Including citizens temporarily living abroad
 Excluding local subsidiaries of foreign corporations
 Residents of reporting country
 Residents of foreign country/Partner
Eg. …

15
Residents & non residents

 Who is a resident of a reporting nation?

 Who is non-resident of a reporting nation?

16
VINAMILK
 Who is a resident of the reporting country-
Vietnam?
YES NO
1. Nonprofit organizations (US Save Children Vietnam, ActionAid
Vietnam, Oxfam Vietnam, YWAM- Youth With A Mission, …) located in
the country
2. Local governments (Ha Tinh People’s Committee/Ha Giang People’s
Committee,…)
3. Business enterprises located in the country (Intel Cor. Vietnam,
Samsung Electronics Vietnam Bac Ninh,..)
4. Tourists, diplomatic and military personnel stationed abroad

5. Temporary migrant workers

6. Citizens studying abroad

7. Citizens undergoing medical treatment abroad

8. United Nations officials

9. Foreign diplomats

10… 18
BOP- Accounting Principles

1. Credits and Debits

2. Double-Entry Bookkeeping

19
BOP- Credits and Debits

 Credit transactions:
 Receiptsof a payment from
foreigners

 Debit transactions
 Making of payments to foreigners

20
BOP- Credits and Debits

 VN credit transaction (+):

 Export of goods and services
 Income received from investments abroad
 Gifts received from foreigners

Examples VN?

21
 BOP- Credits and Debits (cont’d)

 VN debit transaction (-)

 Import of goods and services
 Income paid on investments of foreigners
 Overseas investment by VN residents

Examples VN?

22
BOP – Double – Entry Bookkeeping

 Double-entry bookkeeping means that each

international transaction is recorded twice, once
as a credit and once as a debit of an equal amount

 Total BOP account must always in balance

Debit amounts = Credit amounts

23
 BOP – Double – entry Bookkeeping (cont’d)

Eg 1: Suppose that a VN firm exports $2,000 of

goods to be paid for in 6 months.
Credit (+) Debit (-)
Goods exports $ 2,000
(Transaction that gives rise to a
receipt from abroad)
Financial outflow $ 2,000
(Receipts from exports or increase
in claims on foreigners)

We have a break time for 15 minutes from 15:15-15:30

24
BOP – Double – entry Bookkeeping (cont’d)

Eg 2: Suppose that a U.S resident visits London and

spends $200 on hotel, meals, clothes, etc.
Credit (+) Debit (-)

Travel services purchased $ 200

from foreigners

Financial inflow $200

25
BOP – Double – entry Bookkeeping
(cont’d)
Eg 3. IBM sells &50 million world of computers to a Japan importers.
Payment is made by a bill of exchange, which increases the balance of
New York banks at their bonn correspondents 'bank. The entries on
the U.S BOP would appear as flows:
Credits (+) Debits (-)

Merchandise $50 million

exports

Financial outflow $50 million

26
BOP – Double – entry Bookkeeping
(cont’d)
Eg 4. A U.S resident who owns bonds issued by a Germany company
receives interest payments of $30,000. With payment, the balance
owned by New York banks at their Hamburg affiliate as increased. The
impact of this transaction on the U.S balance of payments would be as
follows:
Credit (+) Debits (-)

Service exports $ 30,000

Financial outflow $ 30,000

27
BOP - Structure

 Current account (CA)

 Capital and financial account (KFA)

 Statistical discrepancy (SD)

 Official reserve transactions (ORT)

 The sum of the three accounts is equal to zero:

CA + KFA + ORT = 0
Or CA + KFA = - ORT

28
BOP- Current account (CA)

 Goods and services trade

 Income flows and payments

 Unilateral transfers

29
 BOP- Current account (CA)
(Goods and services trade)

 Goods and services trade

 Merchandise trade
 Services trade
 Goods and services balance
 Net export of goods and services
 Positive BOP: Export > Import
 Excess exports over import
 Add to GDP
 Negative BOP: Import > Export
 Excess imports over exports
 Subtracted from GDP 30
 BOP- Current account (CA)
(Income flows and payments)

 Income flows and payments

 Net earnings (dividends, interest)
Eg. Net earnings on US investments aboard:
 Earnings on US. Investments abroad
 Minus payments on foreign assets in the U.S

 Compensation to employees

31
 BOP- Current account (CA)
(Unilateral transfers)

 Unilateral transfers
 Transfers of goods and services or financial
assets
 Private transfer payments
 Governmental transfers

32
Current account: Types of
Balance
 Trade Balance:
 Merchandise: Exports – Imports of goods
 Services: Exports – Imports of services
 Income Balance:
 Net investment income: Net income receipts from assets
 Net international compensation to employees: net compensation
of employees
 Net Unilateral Transfers:
 Gifts or grants received from foreign countries – gifts or grants to
foreign countries
=> Current Account = ?

33
BOP-Current account surplus and
deficit
 If the current account > 0 =>
Current account surplus

 If the current account < 0 =>

Current account deficit

34
A summary of the current account
of the U.S for the
Export of goods and services
year 1988 530
Merchandise 319
Services 211
Imports of goods and services -642
Merchandise -447
Services -195
Unilateral transfer, net -15
U.S. Government grants -10
U.S. Government pensions and other transfers -3
Private remittances and other transfers -2
Balance on merchandise trade = ???
Balance on goods and services = ???
Balance on current account = ???
35
 Current Account Surplus, Top 10
economies, Billions of US dollars

Source: IMF (2018): http://data.imf.org/?sk=7a51304b-6426-40c0-83dd-ca473ca1fd52&sId=1484148890404 36

 Current Account Deficit, Top 10 Economies,
Billions of US dollars

Source: IMF (2018): http://data.imf.org/?sk=7a51304b-6426-40c0-83dd-ca473ca1fd52&sId=1484148890404 37

BOP – Capital and Financial
Account
 All purchases or sales of assets, including:
 FDI
 Long- term portfolio investment including
purchases of securities and long-term bank
loans.
 Short-term capital flows including purchases
of securities with maturities less than one
year.
Note: Since 1999, U.S international transaction have been
classified into three groups: the current account, the capital
account, and the financial account.
38
 BOP – Capital and Financial account

 The capital account shows:

 Capital transfers:
 Debt forgiveness

 Other

 The acquisition and disposal of non-produced,

nonfinancial assets between residents and nonresidents
• …
• …..

39
BOP – Capital and Financial
account
 Financial account:
 Direct investment
 Portfolio investment
 Financial derivatives (other than reserves) and
employee stock options
 Other investment
 Reserve assets

40
 Table 13: Summary of U.S. International Transactions
for 2011 (billions of dollars)

Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc. 41
BOP- Statistical discrepancy: Errors and
Omissions

 In principle, total credits must equal total credits as

required by double-entry bookkeeping; But in
calculation, they are not in equal
 Statistics discrepancy results from incorrectly
recording or from not recording at all only one side
of some transactions:
 Errors and omissions
 Information – some is collected, some is estimated
 The statistical discrepancy, which keeps the BOP
account in balance

42
BOP- Official reserve transactions

 Conducted in the form of international

reserve assets by central banks, such as
 Gold
 Convertible currencies (VND is not …)
 IMF credits and SDR (Special Drawing Right)
 Changes in foreign central bank holding of
domestic assets
 Changes in domestic central bank holding of
foreign assets

43
 SDR
 The value of the SDR
is based on a basket of
five currencies
 Chinese renminbi
(RMB) joined the USD,
Euro, JPY, and British
pound sterling in the
SDR basket, effective
Oct. 1, 2016.

IMF: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR 44
 U.S. Reserve assets, May 2020
(Board of Governors of the Federal Reserve System)

Type Amount (Billions

of USD)

Gold stock 11,041

SDR 50,194

Reserve positions in the IMF 26,413

Foreign currencies 41,154

Total 132,239

Vietnam: May 2020: 82,842.8 (millions of USD) 45

BOP- Official reserve account
(Cont’d)
 BOP surplus: It covered by an equal amount
official reserves transaction (reduction in
international reserves of the nation or increase in foreign
holdings of official assets of the nation).

 BOP deficit: It settled by an increase in the

nation’s international reserves and/or
reduction in foreign official holdings of
nation's assets.

46
BOP- Official reserve account
(Cont’d)

 Current account + capital account + financial

account = change in government reserve
assets
 A BOP deficit is associated with a loss of
international reserves
 A BOP surplus is associated with a gain of
international reserves

47
Disequilibrium in the BOP
 A Surplus in the BOP occurs when:
 Total Receipts > Total Payments or
 BOP = CREDIT > DEBIT
 A Deficit in the BOP occurs when:
 Total Payments > Total Receipts or
 BOP = CREDIT < DEBIT

48
The importance of the Current
Account (CA)
Recall the aggregate expenditure equation
macroeconomics:

C+T+S=Y=C+I+G+X-M
 The BOP on Current Account could be re-written
as:

(X - M) = (T - G) + (S - I)
or
(M - X) = (G - T) + (I - S)
CA = Government + Private
deficit deficit I–S
In order improve in CA: The government should use
different measures to:
- T and/or S, or G and/or I
 Are trade deficits a problem?
 A trade deficit is not necessarily a bad thing
 if borrowing is financing investment (which generates
economic growth and income in future) then it is not a
problem
 However, if a country persistently runs a trade
deficit this is something to worry about
 excessive borrowing on capital account to finance
consumption on current account will incur higher
interest payments and eventually lead to reduction
consumption
Balance of international indebtedness
 Summarizes one nation’s overall quantity of
assets and liabilities against the rest of the
world
 Shows whether the nation is a net debtor or a
net creditor
 Record of international position of the
country at a particular time

52
Balance of international indebtedness
 Net creditor to the rest of the world
 Accumulated value of the country – owned
assets abroad
 Exceeds the value of foreign-owned assets in
the country
 Net debtor:
 Value of foreign-owned assets in the country
 Exceeds the accumulated value of the country-
owned assets abroad

53
 VIETNAM- BOP

IMF: file:///C:/Users/Administrator/Downloads/1VNMEA2019002%20(6).pdf 54
 Q&A

55