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    Macroeconomics - Chapter 12

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    tomshave28

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    Macroeconomics - Chapter 12

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    tomshave28
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    12. Macroeconomics_chapter 12

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    10 views19 pages

    Macroeconomics - Chapter 12

    Uploaded by

    tomshave28

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 19

    Chapter 12

    BALANCE OF PAYMENT
    &
    FOREIGN EXCHANGE RATE
    Balance of Payment

     Statement of systematic records of all economic transaction between one country and
    the rest of the world in a given period of time.

     Shows the detailed of the total payments made by one country to other nations and the
    total receipts received by it.

     Refer to difference between the total value of goods and services imported and
    exported over a given period of time
    A.1) Trade balance (balance of visible trade)
    = values of goods exported – value of goods imported

    Example:
    -Export of cars
    -Imports of machines

    A.2) Service balance (balance of invisible trade)


    = value of services exported- values of services imported

    Examples:
    -Banking
    -Insurance
    -Tourist spending
    -Net property income from abroad
    B) Net income balance (net factor payment)
    -Difference between income receipts from abroad and income payments to
    residents abroad

    Example of income receipts from abroad:


    (i) salary or income received from residents working abroad
    (ii) profit, dividends comes from direct investment & portfolio investment
    -Usually shown (+) sign as it is credit items in the current account.

    Example of income payments to residents abroad:


    (i) salary paid to foreign residents working in the country
    (ii) Dividends and profit remittances.
    -Usually shown a (-) sign as it is a debit items.
    C) Current transfers
    -Unilateral transfer from one country to another in a forms of;
    (i) gifts
    (ii) military aids
    (iii) donations and financial aid by the government, private or individual

    Current Acct = A.1 + A.2 + B + C


    E) Capital account
    - Show the net change in the physical or financial asset ownership of a nation
    - Example foreign direct investment (FDI)
    - Two types of transactions;
    (i) private= all types of investment
    (ii) official = government official transaction consist of loans to and from foreign official
    agencies.

    F) Financial account
    - Show the change in international ownership of shares properties, bank deposit, gov securities,
    loan etc.
    - This acct included buying and selling of assets.

    Balance on Capital & Financial = E + F


    H) Errors and omissions
    - Use to balance items to bring the final BOP.

    Overall Acct = Current Acct + Capital & Financial Acct + Errors &
    Omissions

    i) Official reserve account


    • Consist of government gold and foreign currency reserves as well as government
    reserves with the international monetary fund (IMF) and the special drawing rights
    (SDR).
    • CB will buy RM in exchange market to support the RM (not drastically depreciation).
    • Reserve can be used to finance the deficit in any part of the BOP.
    The effect of exports and imports on the economy

     Feedback effects on trading (Kesan maklum balas perdagangan)


     E.g: An increase in Malaysia's GDP will stimulate an increase in domestic
    consumption. Therefore, the demand for imported products as a production
    input will increase and ultimately increase the economic activity of other
    countries.
     Feedback effects on pricing ( Kesan maklum balas harga)
     E.g: Japan's domestic economy was struck by inflation, which resulted in an
    increase in goods prices for export. If Malaysia imports their products,
    Malaysia's domestic goods prices will also increase.
     Inflation can be effect to import or export.
    Exchange Rate

     Exchange rate – the ratio at which 2 currencies are traded.


     The price of one currency in terms of another (Direct quote or Indirect quote).
     The exchange rate is set through:
     the government offering its currency in a fixed exchange system or
     the interaction between supply and demand in the foreign exchange market under a floating
    exchange rate system.
     Foreign exchange market – refers to the interaction between demand & supply of currencies
    – due to 2 main activities
     i.e international trade & international investment (FDI & Portfolio Investment).
    • Exchange rate is determined by the interaction of DD & SS of currency in the foreign
    exchange market.

    • Direct quote – a foreign exchange rate quoted as the domestic currency per unit of the foreign
    currency.

    • In other words, it involves quoting in fixed units of foreign currency against variable amounts
    of the domestic currency.

    • Example : in Malaysia, a direct quote for the US$ would be RM4.20 = 1US$.

    • The difference between supply of Ringgit (RM) and supply of money.


    • Supply of RM – means the total amount of RM in the foreign exchange market,
    subjected to exchange with foreign currencies.

    • Supply of money – refers to the monetary policy exercise by the Central Bank.
    Buyers & Sellers In The Foreign Exchange Rate Market
    Between RM Malaysia & Dollar Australia

     Factors or Activities that Create Demand For Ringgit Malaysia (Supply Of AUD$)

    i. Household, firms or Australian government that imports or buy goods & services from Malaysia.
    ii. Australian tourist that visiting Malaysia.
    iii. Australian investors buying shares, bonds & monetary instruments in Malaysia (portfolio
    investment).
    iv. Australian companies investing in Malaysia (FDI)
    v. Speculator that expecting the fall in the value of AUD$ compared to Malaysian RM.
    Buyers & Sellers In The Foreign Exchange Rate Market
    Between RM Malaysia & Dollar Australia

     Factors or Activities that Create Demand For AUD$ (Supply of MYR)

    i. Household, firms or Malaysian government that imports or buy goods & services from
    Australia.
    ii. Malaysian tourist that visiting Australia.
    iii. Malaysian investors buying shares, bonds & monetary instruments in Australia.
    iv. Malaysian companies investing in Australia.
    v. Speculator that expecting the fall in the value of Malaysian RM compared to AUD$ .
    Market Equilibrium of MYR and AUD$ Exchange

    Figure 12.1: a) MYR exchange Figure 12.1: b) AUDS$ exchange


    • indirect quote • Direct quote
    • exchange rate in AUD$ • exchange rate in RM
    • how much AUD$ for 1RM • how much RM for
    1AUD$
     Figure 12.1 (a) and (b) show the foreign exchange demand and supply between the RM and the AUD$.
     When RM is demanded, the exchange rate is expressed in AUD$ per unit of RM.
     When AUD$ is demanded, the exchange rate is expressed in the RM per unit of the AUD$.
     When the amount of a currency demanded is equal to the amount supplied, the balance of the foreign exchange market
    is reached at the level of the exchange rate agreed by the market.
    • Suppose the exchange rate is RM3.50 = 1AUD$

    • RM depreciates, AUD$ appreciates (at RM/AUD$ axis).

    • Then, the price of goods in M’sia became relatively cheaper


    compared to the price of goods in Australia.

    • Australians will buy more M’sian goods (Australia will SS


    more AUD$/Australia will demand more RM).

    • M’sian exports will increase at the same time, M’sian will


    import less from Australia, and M’sian imports will decrease.

    • Market adjustment: Increase the quantity of AUD$ for every


    unit RM1. Hence, SS of AUD$ will decrease, and DD for RM
    will decrease (RM becomes more expensive than AUD$)

    • RM will appreciate, and AUD$ will depreciate.


    • Now, suppose the exchange rate is RM2.50 = 1AUD$

    • RM appreciates, AUD$ depreciates (at RM/AUD$ axis).

    • Then, the price of goods in M'sia became relatively expensive


    compared to the price of goods in Australia.

    • Malaysia will buy more Australian goods (Msia will SS more


    RM/ Msia will DD more AUD$).

    • Hence, Australian exports will increase; at the same time,


    Australia will import less from M'sian, and Australia's imports
    will decrease.

    • Market adjustment: Increase the quantity of RM for every unit


    1AUD$. Hence, SS of RM will decrease, and DD for AUD$
    will decrease (RM becomes cheaper than AUD$).

    • RM will depreciate, and AUD$ will appreciate.


    Relative Interest Rate

    • Assuming the interest rate (r) in Malaysia is higher than r


    in Thailand.

    • It will attract more investors from Thailand to invest in


    Malaysia (buying more securities in Malaysia).

    • However, before the Thai people invest/ buy securities in


    Malaysia, they must change Baht to RM. Hence, SS of
    Baht increase from S1 to S2.

    • An increase in r attracts Malaysian Firms and Households


    to invest domestically. It will decrease DD for Baht from
    DBaht0 to DBaht1.

    • RM appreciates, and Baht depreciates.


    Relative Price Level

    • Assuming the price in Malaysia is higher than in


    Thailand.

    • It will make Malaysia's products uncompetitive to


    Thailand's. Malaysian products are more expensive
    than Thai products.

    • Malaysia's export decrease (low demand from


    Thailand) will decrease SS for Baht from SS of Baht
    increase from S0 to S1.

    • Increasing Malaysia's prices increases the Malaysian


    demand for Thailand's products. It will increase DD for
    Baht from DBaht0 to DBaht1.

    • RM depreciates, and Baht appreciates.

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