Balance of Payments

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Level 3 Macroeconomics, influences
on the current account.
Revise
Fitch has downgraded New Zealands credit
rating.
This means that interest rates on New Zealand
debt will increase.
An increase in interest rates affects Aggregate
Demand.
Explain how.
Will the increase in interest rates affect the
demand for New Zealand dollars? Justify.

Debt
Accounts
Current account;
balance on goods,
balance on services,
balance on income
and the balance on current transfers.
The current account is usually in deficit (in
NZ); money going out.
The balance on goods has often been positive, but
NZ sees large outflows on the balance of income.
Capital Account
Migrant funds
Intangible assets.


Relatively small.
Financial Account
Direct investment; buying more than 10% of a
company.
Portfolio investment; less than 10% of a
company.


The financial account in New Zealand is in
surplus as it balances the current account
deficit.
Terms of Trade
We need to think of exports in relation to
imports. In other words, can our sales (exports)
cover our purchases (imports)?
So the terms of trade measures the price of
exports relative to imports.

Index Px/Index Pm x 1000
Favourable movements; our exports pay for more
imports.
Unfavourable; our exports pay for less imports.
Fx market
Demand and supply of NZ dollars
NZ$ in
US$/other
currencies
Demand for NZ$
Quantity of NZ$
Supply of NZ$
D2
Demand for NZ$
In terms of foreign exchange, the demand for
NZ$ is based on foreigners who want to trade
with or deal with New Zealand.
E.g., buying our dairy products, having a
holiday in New Zealand, sending kids to study
here or, (VERY IMPORTANT) speculating on the
NZ$.
If the OCR rises, or, to double guess, is likely to
rise, or Aus drops their OCR, then greater demand
for the NZ$.
Fx market
Demand and supply of NZ dollars
NZ$ in
US$/other
currencies
Demand for NZ$
Quantity of NZ$
Supply of NZ$
D2
Appreciation
Supply of NZ$
The supply of New Zealand dollars is based on
us wanting to deal with the rest of the world.
For example, we want to buy Chinese-made
iPads, Chinese-made clothes, Chinese-made
plastics, Arab oil, European cars, go on holiday
to Tonga etc.
We offer our dollars and have to exchange
them for Chinese Yuan, Emirati dirhams (or
US$) or Euros etc.
Fx market
Demand and supply of NZ dollars
NZ$ in
US$/other
currencies
Demand for NZ$
Quantity of NZ$
Supply of NZ$
S2