Professional Documents
Culture Documents
International
Imbalances
Dr. Petre Caraiani
Balance of payments
International transactions are recorded in the
balance of payments
What are the components of the balance of
payments:
o The current account
o The financial account
Double Entry
Bookkeeping
Assume a simple example: US resident buys a
Samsung smart phone with a value of 500USD
What are the effects on the balance of payments:
US current account decreases by 500 USD
What happens to the financial account:
- Samsung will hold assets in value of 500
USD (in the form of currency)
- the financial account records a
positive entry of 500 USD
Current Account
A) Trade Balance
- Balance on Goods
- Balance on Services
B) Income Balance
- Net investment income
- Net international compensation to
employees
C) Net Unilateral Transfer (private remittances)
Financial Account
This the difference between sales of assets to
foreigners and purchases of assets from
foreigners
A) assets owned by a national economy abroad
B) assets owned by foreigners in a certain
national economy
Valuation Changes
Lets take a hypothetical example to see how
valuation changes can have an impact on the Net
International Investment Position
Assume a countrys international asset position,
consists in 10 shares of BMW. The price of each
share is 10 euros. The foreign asset position is
100 euros. We also assume that the total
liabilities are in sum of 150 dollars. Further
assuming an exchange rate of 2 dollars per euro,
implies a NIIP of 200-150=150 USD.
Valuation Changes
What happens if there is a shock in the exchange
rate. Assume that the new exchange rate is of 1
USD to 1 Euro.
The net asset position change to 100 USD. The
NIIP becomes -50 USD.
The country moves from being a net creditor to
the rest of the world to a net debtor.
Valuation Changes
What happens if the price of foreign stock
changes?
Negative NIIP/Positive
NII
We already know that during the last 25 years, US
has had a negative net international investment
position, NIIP<0
US has been a net debtor to the rest of the world
What implies this in terms of the net investment
income position in the current account?
Negative NIIP/Positive
NII
Two potential
explanations
Dark Matter Ricardo Haussman and Federico
Sturznegger
Return differentials
Dark Matter
US authorities (to be more precise, the Bureau of
Economic Analysis) may underestimate the
holdings of net assets
How could this happen?
The records might not register the intangible
human capital which generates returns that are
however recorded
This unrecorded US owned foreign assets was
billed as dark matter
Dark Matter
Lets assume a simple example
Microsoft opens a research center in Bucharest
This would be recorded as foreign asset taking
into account the different investments
(residential, equipment, etc.)
But the actual value of this investment might be
much higher than the recorded ones due to the
high value of human capital, so that this asset
would be recorded at a lower actual value!
At the same time, the profits generated by this
investments, would enter the income account of
the balance of payments
Return Differentials
The second explanation, as already mentioned is
that of return differentials
What does this mean?
US earns higher returns for its assets than the
foreigners earn for assets hold in US
Why would this happen?
US holds a variety of instruments
But foreigners holds mostly US government bonds
providing lower returns