Tenta 8 juni Flashcards
(136 cards)
1
Q
Balance of payments (BOP) statement
A
An income statement för an entire country that records all income and expenditures for that country in its transactions with the ROW over a period of time.
2
Q
What have to balance in BOP?
A
The cash inflows and outflows have to be equal over time.
3
Q
What will generate income?
A
Selling three things: goods, services and assets - all generate capital inflow.
4
Q
Key to BOP accounting?
A
“Follow the money”.
5
Q
What makes BOP accounting hard?
A
- The magnitude of transactions are huge
- The illegal ones are covered and therefore hard to measure
- More and more intangible services are traded…
- Developing countries do not have sufficient resources to do this correctly.
6
Q
3 main accounts of BOP:
A
- Current account
- Capital account - private and public
- Errors & omissions
7
Q
Current account
A
Measures the trade balance - the value of G&S over time.
Current account balance = X-IM.
If X>M = net seller ( CA surplus)
If X
8
Q
Capital account
A
Financial account. Trading of assets. Private measures trade by private firms and individuals while public measures the governmental trade.
Surplus = seller
Deficit = buyer.
9
Q
Errors & Omissions
A
Inevitably transactions will be missed and will not sum up to zero - here the adjustments are made. A very big post can indicate that the economy is illa ute… Not enough control.
10
Q
FER
A
= Foreign exchange reserves. The value of foreign assets held by the country’s CB - buying/selling is recorded in the public capital account.
11
Q
3 ways to interpret + and - in BOP:
A
- is surplus, - is deficit.
- is net cash inflow, - is net cash outflow.
- is net seller, - is net buyer.
All these interpretations are equivalent.
12
Q
Are G&S and capital moving in the same directions?
A
YES! If G&S are leaving the country (net seller) then capital is also moving the country (net buyer of assets instead).
13
Q
Why must the balance of payments balance? Algebraic?
A
Because NII says that.
14
Q
NII: National Income Identity
A
We know that aggregate income is equal to aggregate spending: Y =C + I + G + (X-M).
Manipulating this can give us:
(Y-C-G) - I = (X-M)
And we know that income minus consumptions is equal to savings so:
(S-I) = (X-M)
–> (X-M) + (I-S) = 0
Must balance!!
15
Q
What does NII tell su about current account deficits?
A
Tat if X-M <0 then (I-S) must be >0. So a deficit in trade means a surplus in capital and vice versa.
16
Q
Debit entry in BOP
A
A negative entry in the BOP that records a transaction resulting in a payment abroad by aa domestic resident.
17
Q
Credit entry in BOP
A
A positive entry in the BOP that records a transactions resulting in a payment from abroad to a domestic resident.
18
Q
Double-entry bookkeeping system
A
In the BOP, an international transaction always results in a credit and an offsetting debit entry - therefore the sum of all entries equal zero.
19
Q
Two types of capital flows between countries:
A
- Portfolio investment = assets that results in less than a 10% ownership share in the entity.
- FDI = assets with 10% or greater ownership.
20
Q
What does a BOP deficit mean? Overall it sum to zero, right?
A
Yes, thats right. Overall it will sum to 0, but a deficit refers to a situation when the public capital account is positive (and current account + private capital account sum to negative). Private payments made to foreigners are greater than the received ones.
21
Q
BOP surplus then?
A
It must be a situation where the public capital account is negative due to a trade surplus.
22
Q
BOP equilibrium:
A
When the sum of the current account and the private account is zero so that the official settlements balance is also zero.
23
Q
Is it necessarily good/bad to be a net debtor/creditor?
A
No, it all depends on a lot of things. For ex a debtor have less claims on foreigners than they have on us, but that means that capital is flowing into our nation today. If we use these money well, productive investments, it can payoff in the future with higher welfare. It is all about using the situation right. If the inflows are used for today’s consumption - then the future might be bad when you have to pay back the “loans”.
24
Q
Interpret (S-I)>0
A
Okay, so domestic savings exceeds domestic investment, so when investments are done, there are savings over. This excess will be invested abroad –> capital is exported (importing assets). So home country is exporting capital which results in a capital account deficit. –> I-S <0 so we have a deficit. (and trade surplus instead).
25
Interpret S< I
Okay, so savings is now insufficient for our investments. We have to import savings/capita that results in a capital account surplus.
If (S-I) is negative, then (X-M) must also be negative so this comes along with a trade deficit.
26
Will a policy change have any effect in the trade balance?
Maybe, only if it also affects S or I. According to NII, X and M cannot change if not S or I changes too.
If S goes up by the policy, then (S-I) goes up and so (X-M) cam also rise.
27
Are CA surplus desirable?
| 2 theories
Conventional wisdom says yes. Surpluses are always good.
Empirical evidence/modern theory is not so clear. Countries with trade deficits can have very strong economy. It all depends on what they do with their money.
28
Are transactions a zero-sum game?
Conventional wisdom says again yes. Whatever I win, you lose.
BUT modern theory says that trade is mutually beneficial. Both parties are better off, otherwise you would not have engaged in the transaction. A borrowers do not lose - a borrower can invest in a house to his family, how is that a loss?
29
To understand trade imbalances you must first...
...understand why capital leave some countries and enter other. International capital flows.
30
Exchange rate=
The market price of foreign exchange. It is a relative price of a currency in terms of another. Always stated in pairs, therefore named bilateral rates.
31
Spot market
A market for contracts requiring the immediate sale or purchase of a currency asset.
32
S =
Spot rate.
| NC/1 unit FC.
33
Depreciation
The value of the currency decreases, so the amount needed to purchase the other currency increases.
34
Appreciation
The value of the currency increases, so the amount needed to purchase the other currency decreases.
35
Cross rate
A bilateral exchange rate calculated from two other bilateral exchange rates.
36
Bid price
The rate at which the bank is willing to buy currency from you.
37
Ask price
The rate at which the bank is willing to sell currency to you. The offer.
38
Bid-ask spread
The difference between the bid and the ask price. This is the bank's profit from the trade of currencies.
39
Bid-ask margin
The difference between bid and ask price expressed as a precent of the ask price.
40
Real exchange rate
A bilateral exchange rate that has been adjusted for price changes that occurred in the two nations.
This is used when we care about the purchasing power of our currency.
41
Real exchange rate = s =
=S*(P1/P2)
Ex (SEK/EUR) * (Pe/Ps)
42
Must the real and nominal exchange rates move in the same direction?
No, if the nation's currency depreciates against another, while at the same time prices rise faster than in the other country, this price increase can more than offset the deprecation and cause a real appreciation. --> The purchasing power lowered by the rapid price increase (inflation).
43
Effective exchange rate
A measure of the weighted-average value of a currency relative to a selected group of currencies.
This can then tell us if the currency overall have become weaker or stronger in its value. (Against some countries you rise, and against other you fall, but this gives a "total" view).
44
Which currencies should you incorporate in the EER measure when constructing it?
The ones you judge to be the most important - depends on situation. But mostly your biggest trading partners.
Also, you can put different weights to them
45
REER:
The real effective exchange rate is constructed in much the same way but using the real exchange rates instead.
46
Composite currency:
A currency unit in which the value is expressed as a weighted average of a selected basket of currencies.
47
Spatial arbitrage
The act of profiting from exchange-rate differences that prevail in different geographical markets.
You buy at a low price in one market and sell at a higher rate in another market.
48
Triangular arbitrage
Three transactions undertaken in three different markets and/or in three different currencies in order to profit from differences in prices.
49
What does it mean that demand for currencies is derived demand?
It means that we derive the demand for currencies fromt he demand for the G&S and assets that people use the currency to purchase. So the demand for SEK comes from the demand for our Swedish G&S and assets.
50
Demand curve for currency
Downward sloping curve that relates S to Q. The lower the rate is (cheaper), the more people demand of that currency.
51
Shift in demand curve for a currency
This can occur if something other than S changes, that makes demand for that currency change. Ex. if it is war in Iraq, their currency will probably be less demanded.
52
Supply curve for currency
Upward sloping curve that relates S to Q. If S rises, more of the currency is supplied.
53
Shift in supply curve for a currency
When supply changes at a given S. This can happen due to a lot of things.
54
Equilibrium exchange rate
The market clearing exchange rate - when D=S. The intersection of the two curves. As soon as one of the curves shifts, the equilibrium changes too.
55
How much must a CB intervene to keep the rate fixed?
| diagram
The horizontal gap between the old equilibrium and the new shifted curve. The CB must intervene by selling/buying this amount, Q, of currency.
56
Overvalued currency
A currency in which the current market value is higher than the value predicted by an economic theory model.
57
Undervalued currency
A currency in which the current market value is lower than that predicted by an economic theory model.
58
Purchasing power parity (PPP)
A condition that states that if international arbitrage is unhindered, the price of a G or S in one nation should be the same as the exchange-rate-adjusted price of the same in another nation.
=LOOP.
=P=SP*
59
Relative purchasing power parity
Another version of PPP that realtes exchange rate changes to differences in prices changes across countries.
Change in S = inflation - inflation*
60
Participants in the foreign exchange market (4)
1. Commercial banks
2. Non-bank financial institutions
2. Non-financial firms (large)
3. Central banks
61
Spot transactions
Exchange of two currencies at todays rate for delivery within 2 business days.
62
Forward transactions
Exchange of two currencies at todays F-rate for delivery at some time in the future. Non-standardized. Used to hedge uncertain currency risks.
63
Foreign exchange swaps
Two currencies, specific date and then a reverse exchange of the two same currencies at a further in the future date.
Spot+forward or forward+forward.
64
Derived demand
Means that the demand for the currency comes from the demand for that nation's G&S.
65
Direct vs indirect quotation
Direct is when the rate is quoted as NC/FC (S) and indirect is the reciprocal FC/NC (1/S).
66
The percentage change in the currency value (apprec/deprec) is calculated as:
By taking the old value minus the new, then divided by the old.
So if the SEK/EUR rate rised from 10 to 15 then we have a (10-15)/10 = 50% depreciation of the SEK.
67
Cross-rate
An unobservable exchange rate that is calculated by using two observed exchange rates. If we know how many PLN and TRY 1 EUR is worth, then we can calculate how much PLN/TRY the rate must be - and if not, we have arbitrage opportunities.
68
Difference between arbitrage and speculation:
Arbitrage is when you buy low - sell high by taking advantage of price differences in different markets at the same time, earning risk-free profits.
Speculation instead, is the practice of engaging in risky attempts to profit from short-term expected fluctuations - buy and sell in different moments of time.
69
Effective exchange rate
In any period, a currency can appreciate in value relative to some currencies while depreciating in value against others - the effective rate takes it into account by weighting an average value relative to a basket of foreign currencies.
70
REER
The real effective exchange rate weights the real exchange rates instead, which captures the changes in international competitiveness more accurately.
71
Two versions of hard pegs
1. Dollarization where the currency of another country circulates as the sole legal tender (loss of seignorage and no control over monetary policy)
2. Currency board where an independent monetary agency (instead of CB) which pegs the currency and changes in the foreign reserves determine the level om Ms. (very little room for monetary policy, CB cannot be lender of last resort).
72
5 soft pegs
1. Conventional peg - max fluctuation of 2% from central parity. +/- 1.
2. Stabilized arragement - similar to conventional peg but no formal policy commitment to the peg.
3. Crawling peg - Fixed but the parity may be adjusted in small amounts in regular time interval in response to changes (public and notifies to IMF).
4. Crawl-like arrangement - alike crawling peg but not formal.
5. Peg with horizontal bands - public bands that are at least +/- 1%.
73
2 floating regimes
1. Dirty float - rate is mostly market determined but CB interventions may exist to change and prevent fluctuations.
2. Free floating - much less interventions, almost non-existing.
74
Reserve currency system
One currency acts as official international reserves which CB's set the value of their curerencies relative too.
75
Problem with pegging to another currency
That currency which all peg to will have their independent monetary policy - but that policy may not be optimal for the singel country pegging... Tp hold the parity they must follow and apply the same policy...
76
Gold standard
1870-1913: most economies pegged to gold via mint parity rate that ensured convertibility. Fell 1914 when WW1 started.
77
Was gold standard stable?
In the LR yes but in the SR no... The price stability was linked to the stability of the relative price of gold - when more gold was discovered the price of gold reduced and so did the basket of goods.
78
Bretton Woods System
A conventional peg (+-1%) where countries pegged to USD which in turn pegged to gold. The Bretton Woods agreements also established the IMF, the World Bank and GATT.
79
Forward exchange market
A market for forward contracts, traded by hedgers (reduce risk) and speculators (taking on the risk).
80
Foreign exchange risk:
The risk that the value of a currency will change in an unexpected way causing you a loss in your assets/liabilities.
81
How can a changed S hurt an international business/investor? (4)
Either the...
1. Assets loses its value.
2. Liabilities increases its value.
3. Foreign income decreases
4. Or the foreign expenditures increases.
82
Which part bears the risk in an export/import contract?
The part with the currency which the contract is not specified in - that part does not know for sure what the payment will be in the future.
83
Other risks than currency risk?
- new tax policies
- trade war
- default risk
- liquidity risk
- country risk
etc.
84
3 ways for a trader to get rid of the risk:
1. Pre-pay. Go to the S-market and convert your currency and pay the trading partner (losing the opportunity to invest the money meanwhile).
2. Sign the contract in your own currency.
3. Sign a forward contract, either perfectly or partially.
85
Are forward contracts standardized?
No, they are very flexible and comes without fees - therefore very attractive.
86
Long position
The buy position. You buy the foreign currency in the F-market.
87
Short position
Sell position. Selling the foreign currency in the F market.
88
Can F and S be the same?
Yes, as a coincidence, but they are both determined by D and S in their own different markets.
89
Is S interesting for someone signing a F-contract?
No, not necessarily. Whatever S might be, the contract is written on the F-rate.
90
What is the dealer doing in the F-market?
Making money - they sell the currency at a higher price. They can buy the currency at S today (which is mostly lower) and sell at F - also they earn profits from the bid-ask spread. Making the financial market work.
91
What is the "cost" of the F-contract?
The difference between S and F - (f-S/S) - the forward premium. This is the cost of hedging instead of pre-payment.
92
What does the dealer want to happen with the rates?
Since they are shorting (selling) the foreign currency, they want it to become cheaper (depreciate) in the future --> profits!
If the S appreciates they will only make profits as long as it does not appreciate mor then the forward premium (ex 3%).
93
F as a predictor
F is approximately equal to the expectations of S in the future. A speculator will use this info to trade on.
94
What must F be to prevent arbitrage?
F must be an unbiased predictor of the future S - if F is systematically too high/low the dealers will fall rapidly.
95
What will a speculator do if she thinks the EUR is over/undervalued?
Overvalued - she will sell.
| Undervalued - she will buy.
96
Step-by-step if speculator thinks EUR will depreciate against SEK, but F is at premium??
1. Sign a F-contract to SHORT (sell) 1 million EUR.
2. After 6 months receives SEK.
3. Convert SEK into EUR again but now receives MORE than 1 million.
4. Pay off the 1 million and the rest is profit.
97
What if many speculators have the same expectations?
Supply of EUR till rise in the F market and F will therefore decrease until their expectations become selffulfilling (until in becomes an unbiased predictor of the future S since forecast will reflect ALL traders).
98
3 ways of using forward contracts?
1. Hedging
2. Speculation
3. Arbitrage
99
LOOR
States that the return on identical assets must have the same return, when adjusted for S and F - otherwise arbitrage opportunities exist.
100
CIPC
As LOOR states in words, CIPC states in equational form that the total return on assets must be equal.
R-R* = (F-S)/S
Interest rate differential = forward premium.
101
Interest Parity
When R=R* so that there is no expected change in S.
102
When are investors indifferent?
When CIPC holds, so that the returns actually are equal.
103
Interpretations of F
1. Forward discount on the foreign currency by 1,4%-
2. Forward markets expects S to decrease by 1,4%
3. Covered return in the foreign currency.
104
Why does interest parity fail to hold in the international markets?
Because S is almost always expected to change so F is rarely equal to S.
105
CIPC assumptions that may not be so sure in reality:
* R and R* are equivalent rates - but the underlying assets are NEVER identical...
* F- and S-markets are active - not so true for all currencies...
* High CM - barriers prevails between many countries....
* No transaction costs and taxes...
106
Are the four variables in CIPC correlated?
Yes, we see high grade of correlation in empirical data. When one side changes (R, R*) we expect F and S to change in the same direction.
107
What is F? (3)
- The F that clears the forward market (S=D)
- F is the expected future S.
- No-arbitrage rate of exchange.
108
1 basis point
0,01% = 0,0001.
| So 1% is 100 basis points and 0,15% is 15 basis points osv.
109
What is crucial when calculating what F should be according to CIPC?
It is important that you make sure all rates are denominated in the same maturity.
110
Effects on S, F, R and R* if total return on foreign investment is higher?
Ex more attractive to invest in EUR than SEK.
* S will increase as people are demanding FC to invest in EUR.
* F will decrease as people are taking short positions in the forward market (F is at premium so people sell EUR)
* R will increase as this is the borrow-nation (people borrow in SEK so that they can convert them into EUR, demand for SEK increases)
* R* capital is flowing in so R* will fall.
111
Are the arbitragers taking the same positions in the S- and F-market?
No, they are taking offsetting positions. In one market the buy, in the other they sell.
112
Approximation of the profits?
Taking the basins points times the principal amount invested.
113
Potential problems with arbitrage and CIPC?
- Need latest technology
- Taxes on profits
- Other risks.
- Borrowing constraints
- Active F- and S-market
- Capital controls
114
The risk of having FEX?
With a floating we have day-to-day risks that affect all kinds of economic contracts but with FEX the parity is fixed at a certain point in time, BUT, however, there are big systematic risks in the long un that the government might change the parity itself through revaluation/devaluation.
115
Monetary base
The CB's holdings of DC+FER.
116
Money multiplier (m)
The number by which a reserve measure is multiplied to obtain the total money stock of an economy.
1/RR.
117
Sterilization
A CB policy of altering DC in an equal and opposite direction relative to variations in FER so as to prevent the monetary base from changing.
118
Money demand
Md = kPy or equivalently in the long run as PPP hold: kSP*y
119
Money supply
Ms = (m)(DC+FER)
120
What is the difference in outcome according to the monetary model when using fixed vs float?
Under a float, the value of the domestic currency changes and take the economy back to equilibrium, but with fixed it is the change in the nation's BOP that force the CB to intervene.
121
Advantage of the real GDP measure
It is adjusted for prices by either the GDP price deflator or CPI, so the measure is better to use when comparing different nations or the same nation over time. A better measure for real production rather than the value of the production.
122
The income identity:
Think about what HH spend their income on:
| y= c + s + t + im
123
Production identity:
Think about what the output are used for:
| y = c + i + g + x
124
What does change in yd divided by change in yd tell us?
=1 = MPC + MPS + MPIM
So, when the real disposable income increases with 1 unit, consumption increases by MPC, savings increases by MPS and imports increases by MPIM.
125
Autonomous consumption
The amount of consumption that is independent of y.
| This is equal to (s0-im0)
126
Aggregate expenditures:
c + i + g + x
This is a schedule depicting total desired expenditures on domestic G&S at each level of y.
127
IS schedule
Set of possible combinations of real income and R that is necessary to maintain income-expenditure equilibrium.
128
3 motives for holding money:
1. Transactions motive, depends on y
2. Precautionary motive, depends on y
3. Portfolio motive, depends on R.
129
LM schedule
Set of combinations of y and R that maintains money market equilibrium.
130
BP schedule
Set of y and R combinations that os consistent with a BP equilibrium in which current + capital =0.
131
Liquidity effect:
A reduction in the equilibrium R stemming from an increase in money supply.
132
Crowding out effect
A decline in investment spending induced by a rise in R cause by a rise in y that follows an expansionary fiscal policy action.
133
Locomotive effect
A stimulus to real income growth in one nation due to an increase in real income in another country.
134
Beggar-thy-neighbour effect
A policy action of one nation that benefits that nation's economy but worsens economic performance in another.
135
Economic efficiency
The allocation of scarce resources at minimum cost.
136
Monetary policy autonomy
The capability of a CB to engage in monetary policy actions independent of the actions of other CBs.
