...1.Read the article Asset Price Booms and Current Account Deficits. Explain the basic premise of the article and describe the impact of the real estate and financial asset prices on the U.S. current account deficit. The U.S. stock market experienced pronounced growth preceding the crisis which hit its peak in 2008. This growth coincided with reduced rates of savings (even a negative savings rate at times) as assets were valued highly and used as collateral for additional debt taken on by consumers to purchase additional goods. Those private investors leveraged heavily in the market and feeling perhaps ‘overly’ confident because of the impressive growth and also the rising value of their real estate, were especially vulnerable when the recession hit. Institutional investors such as Fannie Mae and Freddie Mac were induced by the government to issue loans to lesser qualified applicants. This created a massive asset price bubble which culminated in the economic crisis. This recession coincided with jobs losses, sharp declines in real estate values to the point where mortgages went ‘underwater’ (meaning that the value of the real estate was to a certain extent less than remaining amount owed for the property), and a sharp contraction on Wall Street. Paul Bergin, UC-Davis professor and visiting scholar in the Economic Research Department of the Federal Reserve Bank of San Francisco, states that “Rising asset values in the United States permitted households to borrow more easily...
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...| US & the pertaining issue of Current Account Deficit: As mentioned in the given case, “A country with good investment prospects, a large budget deficit, or a low propensity to save tends to have a net capital inflow and a current account deficit”. The onus is on: a) Encouraging consumer spending by giving tax cuts and low interest rates. b) Providing good investment prospects to foreign customers as most of the big-shot investors find American securities less risky as compared to EU or other emerging markets. c) Consistent decline in competitiveness as the country is vastly dependent on importing goods rather than developing providing a boom to economies like India and China. * Ever since early 90s, the US has always imported more than they export. Thus which on the other hand has led to a need for cheaper imports from other countries to sustain an average American household. Since cheap labor is available in foreign countries most of the work is outsourced and hence their production is not up to their full potential. * The government on the other hand focuses on imports rather than improve the supply leading to a poor manufacturing sector.This is an advantage to countries like China which have cheap labor and is a major exporter to the U.S. Also as the government focuses on imports rather than supply to meet the demand major exporters like China get benefited. * The...
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...The current-account balance is a report that covers a certain period; regularly a year, which indicates the difference between the inflow and outflow of money into and out of a country from the trade in goods and services, investment, saving, and income and cash transfers. When a country’s current account balance is positive (running a surplus), the country is a net lender to the rest of the world. When a country’s current account balance is negative (running a deficit), the country is a net borrower from the rest of the world. Therefore, the current-account balance is a way to determine its economic activity and can strongly reflect a country’s overall economic position. Ideally speaking, the current account balance should be zero, in the real world however this is highly improbable. The formula used for calculating the current account balance is CAB = X-M+NY+NCT. Where X = Exports of goods and services, M = Imports of goods and services, NY = Net income abroad and NCT = Net current transfers. It is important to understand from where a deficit or a surplus is stemming because sometimes looking at the current account as a whole could be misleading. In the United States, for example, current account deficit has been increasing steadily for several years now. Among the factors that have created a current account deficit, four of these are described as follows: 1) Consumer spending had been on the rise in the United States, motivated in great part to a growing real estate...
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...U.S. Current Account Deficit On-going political battles over U.S. government budgets, the Federal Reserve Bank's intimations that it might raise interest rates, even as sovereign-debtcrises in Europe remained unresolved, the Chinese and some other developing-country economiesseemed precarious are the worldwide economy overview in 2013. The role of the U.S. currentaccount deficit had receded into the background. In fact, the currentaccount deficit had declinedfrom an average of almost 5% of GDP from 2000 through 2007 to about 3% of GDP in 2011 and 2012. Much of the reason for that moderation was presumably not long-term: the slow U.S. growth hadreduced imports. The financial counterpart of the U.S. current account deficits was the continuingcapital inflow from abroad, as foreigners financed Americans' spending in excess of their income. Asthese inflows accumulated, the gap between U.S. holdings of foreign assets and foreign holdings ofU.S. assets (known as the net international investment position, or NIP) was sinking to anunprecedented nadir. Still balanced in 1985, the NIIP had reached an almost $4.0 trillion deficit in2012. Most U.S. policymakers had long downplayed the risks implied by the large current accountdeficit and net international investment position. They insisted that the deficit and NIIP simplyreflected the attractiveness of the U.S. economy as a destination for global investment. For example,the 2006 Economic Report of the President focused on the current account's...
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...its Current Account Deficit America's current account deficit has been fluctuating over the past 20 years. From 1991 it rose to a record high of about 6% of GDP in 2006 and it began to fall a year later to finally reach a level of 3% of GDP in 20091. Capital inflows finance the current account deficit. Economists are wondering if such large inflows are sustainable. According to economic theory, a current account deficit is not necessarily harmful as it stimulates a period of inward investment that can actually boost a country’s employment and investments. The current account deficit is still considered too large even at 3% and there is fear that it is caused by the recession. However economists believe that the US current account deficit may actually contribute to its development and attract foreign investors. The current account deficit is actually a good arsenal for the development of a country. For example, Japan invested a lot in the UK and this caused the emergence of new jobs in addition to the increased investment. The following paragraphs will enlighten more about how the current account of the US can affect its economy. 1 Feenstra, Robert C., and Alan M. Taylor. "National and International Account." International Macroeconomics. New York: Worth, 2012. 172-77. Print. A current account deficit (CAD) occurs when a country has an excess of one or more of the four factors (goods, services, income and unilateral transfers) making up the account. When ...
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...usually a year. It represents a summation of country's current demand and supply of the claims on foreign currencies and of foreign claims on its currency. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. Current account:The difference between a nation’s savings and its investment. The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade, net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. The current account and the capital account are the two main components of a nation’s balance of payments. Capital account:In macroeconomics and international finance, the capital account is one of two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets. A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the...
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...Assignment #1 1 a) The capital account of Country A will increase by 10 million in year 1 since that is the amount of overseas investment it takes to develop the mine. The capital account is essentially capital inflow – capital outflow. Since Country A does not have any inward or outward foreign direct investment prior to this event, it is safe to assume that the capital account will increase by 10 million in year 1. In addition, in year 1, the trade account decrease by 10 million since 10 million dollars worth of equipment is shipped from overseas. In other words, the trade account which is X – M, will decrease by year 1’s import value. Lastly, the service account will remain unchanged and hence have no effect on the current account. In year 2, the trade account will increase by 2 million since Country A will export all of its gold produced to overseas. 1 b) As a result of the discovery of the mine, Country A’s imports will rise by 10 million dollars in year 1 due to the imported equipment costs of developing the mine. Furthermore, in year 1, Country A’s savings will remain the same while the value of their investment increases by 10 million. In year 1, the value of the current account decreases from the surge of imports. Hence according to the equation that states current account + capital account = change in federal reserves, Country A would have to decrease their federal reserve by the current account’s deficit. However, as the goldmine starts its production and...
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...an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners. COMPARATIVE ANALYSIS OF BALANCE OF INDIAN PERSPECTIVE Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. The balance of payments of a country is a systematic record of all transactions between the residents of a country and the rest of the...
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...Choose a country and retrieve the latest data on its budget deficit/surplus and its current balance and explain the relationship. Do government budget deficits always lead to current account deficits? Identify two other possible sources for current account deficits. Are current account deficits necessarily a problem? Explain. (a) Country chosen: India. As of July 2015, India's current account balance = - $6.2 billion (Current account deficit) Budget deficit = $103.1 billion Source: (i) https://www.cia.gov/library/publications/the-world-factbook/geos/in.html (ii) http://www.tradingeconomics.com/india/current-account] Budget deficit and current account deficit tend to be positively correlated. (b) According to the Twin Deficit Hypothesis, if there is a budget deficit, to keep the national income equation in balance, there has to be a trade deficit. Since the current account of balance of payments comprises exports and imports of goods and services, current account can be considered an approximation of trade deficit. Therefore, budget deficit and current account deficit (CAD) move in tandem. (c) However, budget deficits are not solely responsible for CAD. If the economy is growing at such a rate that domestic aggregate demand is rapidly increasing without corresponding increase in domestic aggregate supply, the demand deficit should be met by imports, so the imports increase and CAD increases. Again, if the domestic currency appreciates due to external global economic...
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...14/02/2013 ZeeNews BSE | NSE | World DNA Biz Bollywood Current Account Deficit could exceed 4.2% in current fiscal: Rangarajan TV & Videos Travel Cars Cricket Health Colleges Career Advice Mobile Property Free Mail NSE Prices Search... Quotes Go February 14, 2013 HOME In-Focus NEWS Bullion SHARE BAZAAR Personal Finance COMPANY WATCH Property Plus MUTUAL FUND Gadgets & More DERIVATIVES Wheelocity IPO Pics MANDI FOREX BUDGET 2013 Press Releases Slideshows Videos SENSEX 19497 -110.90 NIFTY 5897 -36.00 PORTFOLIO TOP NEWS MOST READ MOST VIEWED Budget 2013: Congress leaders ask FM to raise IT exemption limit 2G: SC dismisses curative petitions of telcos and Raja GST panel to frame model GST law; 3 committees to address issues No loans to troubled Sahara companies; has Rs 800 crore in deposits: SBI Samsung takes on Nokia with 'smarter' Rex series; price starts at Rs 4,000 Current Account Deficit could exceed 4.2% in current fiscal: Rangarajan Last Updated: Thursday, February 14, 2013, 14:46 0 Tw eet Like 0 Tags: India's current account deficit , India's economy , India's GDP grow th , C Rangarajan New Delhi: Amid widening trade gap, the Current Account Deficit (CAD) this year is likely to exceed 4.2 percent of GDP recorded in 2011-12, said Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said. "The CAD will be higher than last year's level. We expect the third quarter figures will...
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...countries. BOP is based on double-entry bookkeeping. Every transaction is recorded twice, once as a debit and once as a credit. According to accounting convention, a source of funds (either a decrease in assets or an increase in liabilities) is a credit and a use of funds (either an increase in assets or a decrease in liabilities) is a debit. Inflows are reported with a positive sign and are listed as a credit. Outflows are reported with a negative sign and are reported as a debit. Three major BOP categories: – Current Account: records flows of goods, services, and transfers. – Capital Account: shows public and private investment and lending activities. – Official Reserves Account: measures changes in holdings of gold and foreign currencies by official monetary institutions. By definition, the overall BOP must balance. (Current account balance) + (Capital account balance) ( (Official reserves account) = BOP = 0 BOP is related to the foreign exchange market. All transactions that affect the inflows and outflows of foreign currency are recorded in the BOP. Exhibit 2.1 Balance of Payments Categories |Credits (+) |Debits (-) | | | | |a. Exports of goods |b...
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... December 2011 Provisional data indicate that the current account deficit widened by US$116.4 million in December 2011, relative to the deficit in December 2010 (see Table). This deterioration largely reflected a widening of the deficit on the goods sub-account mainly due to an increase of US$69.7 million in imports. In particular, there were respective expansions of 89.6 per cent (US$55.2 million), 14.6 per cent (US$23.9 million) and 18.7 per cent (US$13.4 million) in imports of chemicals, fuel and food. The increase in fuel imports reflected a 10.5 per cent rise in the average price of oil as well as a marginal expansion in the volume of fuel imported during the month. The impact of the expansion in imports on the goods balance was partly offset by an increase of US$19.0 million in exports, largely reflecting higher earnings from non-traditional exports and re-exports. There was a decline of US$36.5 million in the surplus on the services sub-account in December, mainly attributed to a reduction in net travel receipts as well as higher freight charges associated with the expansion in imports. Concurrently, the surplus on the current transfers sub-account declined by US$4.3 million, primarily reflecting the non-repetition of official grant flows in the month. With regard to financing, net private and official capital inflows were more than sufficient to finance the deficit on the current account. As a result, the NIR of the Bank of Jamaica increased by US$4...
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...for this depreciation of the rupee and the outlook for the same. It also reflects on the policy options to help prevent the depreciation of the Rupee I. Economics of Currency Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting the market movement. However, over a longer term currency movement is determined by following factors: Balance of Payments: It is the sum of current account and capital account of a country and is an external account of a country with other countries. Both current account and capital account play a role in determining the movement of the currency: o Current Account Surplus/Deficit: Current account surplus means exports are more than imports. In economics we assume prices to be in equilibrium and hence to balance the surplus, the currency should appreciate. Likewise for current account deficit countries, the currency should depreciate. Capital Account flows: As currency adjustments do not happen immediately to adjust current account surpluses and deficits, capital...
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...| | | SCHOOL OF BUSINES Project on: Balance of Payments Prepared By: Hassan ajami, Mansour daher, reda younes,ali Mohsen, Mohammad kanso Submitted To: Dr. habib awada Course BFIN 430 (International Banking & Finance). Spring 2013-2014 TABLE OF CONTENTS 1- INTRODUCING THE BOP CONCEPT: 1.1) Brief History 5 1.2) Basic Definition 5 1.3) System of Recording 7 1.3.1) Identifying Transactions 7 1.3.2) The Debit & Credit System 9 2- GENERAL STRUCTURE OF THE BOP: 2.1) Main Components 12 2.1.1) Current Account 12 2.1.2) Trade Balance 15 2.1.3) Capital Account 16 2.1.4) Financial Account 18 2.1.5) Errors & Omissions 22 2.2) Complications 23 2.2.1) Accounts Interrelation 23 2.2.2) Deficit & Surplus Dilemmas 25 3- BOP FROM EQUILIBRIUM TO DISEQUILIBRIUM 3.1) BOP in Equilibrium 27 3.1.1) Equilibrium Conditions 27 3.1.2) Equilibrium Model 27 3.1.3) Types of Equilibrium 29 3.2) BOP in Disequilibrium 29 3.2.1) Causes of Disequilibrium 29 3.2.2) Types of Disequilibrium 32 3.2.3) Consequences of Disequilibrium 33 3.2.4) Measures to Eliminate Disequilibrium 33 3.2.5) Demonstrating Disequilibrium 35 4- STUDYING THE LEBANESE BOP 4.1) Historical Events: 1999 and before 37 4.2) Major Events of the Decade: 2000-2008 38 4.3) Recent Events: 2009-2010 40 5- CONCLUSION Importance of BOP 44 1- INTRODUCING...
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...Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world.[1] These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts ofloans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly...
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