New Revision Presentation on Balance of Payment Adjustment Policies
This new revision presentation focuses on potential adjustment policies for the balance of payments. The presentation links to some recent BBC audio-visual clips and other external sources and covers a range of countries. Here are some of the key points:
- Some trade deficits are partially self correcting
- But economic recession and a depreciation are not enough if the root causes lie on the supply-side of the economy
- Ultimately BoP adjustment requires:
* A period of below trend growth
* Improvement in investment in traded goods industries
* Control of price and cost inflation relative to that of our competitors
* Open trade to drive better export performance
Protectionism is not the answer!
Download PowerPoint version (ppt)
Trade Imbalances - Presentation
One feature of the world economy is the persistent and large scale of trade imbalances. Some countries have huge surpluses and others experience deficits every year. Trade imbalances are one factor behind the resurgence of ‘protectionist’ sentiment and they have consequences for growth, jobs and living standards. I have put together a collection of twenty of the trade data charts that I use regularly in teaching A2 and AS macro - I hope they might be useful for some colleagues when covering trade and balance of payments topics.
read more...»Does the balance of payments matter anymore?
I have reached that time of the year when the dust is wiped from my balance of payments notes, charts are refreshed and my A2 group delve into the trade figues for different countries and ask the age old question, does it really matter if there are sizeable balance of payments imbalances?
The huge variations in the scale of current account deficits and surpluses from within the body of OECD countries seems to make this debate a live one again. Iceland’s financial crisis, the external deficits of many central and eastern european countries just a few years after their accession to the EU single market. And the continuing debate about the economics of the cavernous trade imbalances between China and the United States persuade me that ignoring the current account is a dangerous game.
As part of the discussion I have drawn some recent data from the OECD World Economic Outlook (November 2008) and a short glossary piece from the excellent Economist website. This is available below should colleagues wish to use and amend for their own students.
Student handout (word format)
Is_there_such_a_thing_as_a_balance_of_payments_crisis.doc
Beta Currencies and PMD
Beta Currencies
The continued depreciation of sterling - most notably against the Euro - continues to dominate the economic headlines. One Euro now buys 95 pence and parity is much more likely than I thought when I wrote about the exchange rate last week.
For your exams remember that you need to have a clear handle on
Why the currency is falling (causation)
What the main demand and supply-side effects of this are (consequences)
The possible policy responses (intervention)
With the latter keep in mind that the government and the central bank does not have a target for the external value of the pound although they recognise that it plays an important role in influencing the components of aggregate demand (C+I+G+X-M and also changes in short run aggregate supply (SRAS) e.g. through movements in the prices of imported goods and services.
Another approach for critical analysis of the exchange rate’s fall is to use the acronym PMD
P - plusses - i.e. what are the main advantages of a fall in the currency?
M - minuses - what are the negative effects for the UK economy at this time and for different agents (businesses and consumers)
D - depends - “it depends on” is one of the best evaluation phrases you can use - sterling has fallen by more than 20 per cent (on a trade weighted basis) over the last year. This is a significant depreciation - but the effects DEPEND on many factors - here are a few:
Do exporters reduce their overseas prices or choose instead to keep prices the same and make a higher profit margin?
Do foreign consumers switch their demand to UK exports if and when our exports become more price competitive?
Will the negative real income effect of a global economic downturn offset the competitive advantage from having a lower exchange rate?
Will higher import prices help to prevent deflation in the UK next year?
Ambrose Evans-Pritchard has an article in the Telegraph today which argues that “Sterling fall is a life-saver for UK economy”
“Stephen Jen, currency chief at Morgan Stanley, said sterling is a “high-beta” currency, meaning that it is highly-geared to the global economic cycle. It shoots up during good times and plunges during bad times. It should return to health if and when the world emerges from economic winter.”
A related piece claims that the Sterling slide is the worst since 1931
“The pound has now fallen by 23pc against a basket of other currencies, according to figures from the Bank of England. The fall is sharper than the devaluations in 1992, after leaving the Exchange Rate Mechanism, 1976, when the International Monetary Fund was forced to intervene, and 1949, when a host of countries slumped against the dollar. The devaluation is only matched by the moment in 1931 when, under Ramsay MacDonald, the UK was forced to abandon the gold standard, plunging by more than 24pc against the dollar. The parallel is significant, since many economists have attributed the gold standard exit as one of the main reasons the UK enjoyed a relatively mild depression in the 1930s, while the US suffered mass unemployment and saw its economy shrink by a third.”
Why is the pound falling in value and does it matter?
Sterling in freefall; the pound takes a battering; Britain’s currency in a nosedive – the media are full of headlines about the abrupt depreciation in the value of the pound sterling in the global foreign exchange markets.
Sterling’s trade weighted price has dipped to its lowest level since October 1996. And the suddenness and severity of the depreciation has taken economists back to September 1992 when the pound made an unceremonious departure from the European exchange rate mechanism.
read more...»The UK’s record trade deficit
1697 - the year in which St Paul’s Cathedral was opened in London, the Royal African Company lost its monopoly on the slave trade and the year of birth for Canaletto the Italian artist.
If we are to trust the accuracy of trade data stretching back over three hundred years, the UK has just recorded its biggest ever monthly deficit in trade in goods. July’s deficit with the rest of the world has been revised upwards to £8.238bn - the biggest gap since records began in 1697 - reported here in the Guardian. Despite the competitive boost given by a depreciating currency, weakening demand in many of the UK’s major export markets is providing an important dampener on the ability of export businesses to provide a rebalancing of aggegate demand in the UK. Imports are also falling as the national belt is collectively tightened.
The annual trade deficit in goods last year came in at a touch below £90 billion. What price an annual trade and a budget deficit that both exceed £100 billion in 2009 or 2010?
Trade charts
Trade_Balances.ppt
High oil prices threaten Asian trade model
Ambrose Evans-Pritchard is on good form in the Telegraph today looking at how the spike in oil prices is theatening the very basis of the Asian trade model. In a world where distance now costs money - ever-rising freight charges are acting like an import tariff for countries whose export-led growth has been built on mass volume manufacturing and the ability to transport these products in huge bulk around the world’s shipping lanes at a relatively low cost.
“The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete. Asia’s intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin. Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded….........globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.”
The rest of the article is here
Trade deficits and currency depreciations
The Economist has a very relevant feature this week on the connection between countries running sizeable current account deficits on their balance of payments and movements in their exchange rate. The carry trade has been a factor in recent years acting to prevent exchange rate depreciations from helping some countries to adjust their current account deficits downwards but now some of the biggest deficit countries including the UK are experiencing notable exchange rate weakness.
“Current-account imbalances are once again exerting a powerful influence over currencies. The chart shows that the weakest currencies this year have been in countries with deficits, from Britain to South Africa.”
This is not to say that exchange rate depreciations on their own are sufficient to make much of a dent in the UK trade deficit for the root causes are supply-side in nature. But it will be interesting to see how much of an improvement we see in the UK trade figures over the next year or so as the combined effects of a sharp consumer slowdown and a weaker currency start to make an impact.
The Economist article is here
Revision: Financing a BoP Deficit
A one page revision note designed for A2 economists on the current and capital account of the balance of payments
Revision note
Revision_Financing_BoP_Deficit.pdf
This links in with the revision presentation on the UK balance of payments which is available here
UK Balance of Payments in 2007
A revision presentation is streamed here - I will upload the presentation in powerpoint format a bit later
Does a current account deficit matter?
Yes according to economist Roger Bootle writing in the latest edition of the Deloitte Economic Review and reported in this article from the Financial Times.
“Britain is headed for its highest peacetime current account deficit and both household and government spending will have to slow painfully to correct it, according to economist Roger Bootle”
read more...»Chart of the Day: UK Trade Balance in Commodities
The UK is now a net importer of all types of commodity. For nearly thirty years we have been a net exporter of oil but this has now come to an end with the long-term decline in North Sea crude oil output. The monthly deficit in finished manufactured goods has more than doubled since 2000.
PowerPoint Chart
Commodity_Trade_UK.ppt
Our whopping trade deficit!
International trade statistics always come with a health warning atatched to them - the data on the value of exports and imports is frequently subject to future revisions. That said, the ONS released figures today showing that the UK economy ran a current account deficit for the year 2007 of £57.8 billion (-4.2 per cent of GDP), compared with a deficit of £50.7 billion in 2006 (-3.9 per cent of GDP). The rise in the annual deficit was mainly due to a higher deficit on trade in goods and a lower surplus on investment income. A deficit of £46.6 billion was recorded with the EU in the 2007,
compared with a deficit of £39.0 billion in 2006. The deficit on trade in goods was £87.6 billion in 2007, a rise of £10.1 billion compared with 2006. The surplus for trade in services was £38.5 billion in 2007, a rise of £7.4 billion compared with 2006. You can download the data here
I have produced a chart summary of some of the key stats which might be useful when revising the current account with students.
PowerPoint
UK_BoP_2007.ppt
Yuan’s World
Countries running gigantic trade surpluses must take some responsibility for rebalancing the world economy by raising their own domestic demand for goods and services. That was the message I took from a speech on the balance of payments given last week by John Gieve, deputy governor of the Bank of England. In a talk to the Sovereign Wealth Management Conference in London. Mr Gieve argued that stronger action is needed to correct some of the deep rooted balance of payments imbalances in the world economy and that sovereign wealth funds will have an increasing role to play by boosting investment in their domestic economies to close some of the gap between domestic savings and investment.
Some key points from his speech are given below:
read more...»Revision Focus: Export Performance
Explain the factors which may help to determine an economy’s export performance (20 marks)
A revision note on some of the factors that shape the growth of exports for an economy
read more...»A Tale of Two Trade Deficits
‘Most of our imports these days come from overseas”. (George W Bush)
The publication of the overseas trade figures rarely makes headline news these days, the balance of payments isn’t as high in the national consciousness as it once was in days of yore - there are still economics teachers out there who remember the sterling crises of the late 1960s and early 1970s! But today we had confirmation (in so far as the trade data can ever be relied upon) that the United States has seen the first reduction in its trade deficit in goods and services for six years whilst the UK has just notched up its biggest ever gap between the value of exports and imports!
read more...»The success of our creative industries
The occasion of the annual BAFTA awards for film-making is an appropriate time to celebrate the contribution that creative industries are making to the health and success of the British economy. In a major report published in 2007, the OECD ranked the UK as having the highest share of national income accounted for by creative industries such as film and television, the printed media, advertising, architecture, computer games, design and fashion. In 2006, creative industries contributed over £60bn to the UK economy and, with export earnings in excess of £15bn, they accounted for nearly eight per cent of our GDP.
read more...»
