國際金融學(xué)課件：Chapter 6 Adjustments in the Balance of Payments the Income Adjustment Mechanism

1、Adjustments in the Balance of Payments: the Income Adjustment Mechanism6Chapter Objective:This chapter will give you some discussion about the automatic income adjustment in the balance of payments.Chapter outline1.Introduction2.Income determination in a closed economy(1)Determination of the equilib

2、rium national income in a closed(2)Multiplier in a closed economy3. Income determination in a small open economy(1)Import function(2) Determination of the equilibrium national income in an open(3)Foreign trade multiplier4.Foreign Repercussions5.Absorption approach6.Monetary adjustments and synthesis

3、 of the automatic adjustments1.IntroductionThe elasticities approach assumed income remain constant and the adjustment was brought about by automatic price changes, but with automatic income adjustment the price remained constant and the automatic income changes lead to BP adjustment.Assumption: pri

4、ces, wages, interest tares are constant.Fixed exchange rateAt less than full employment2.Income determination in a closed economy(1)Determination of the equilibrium national income in a closedY=C(Y)+I MPC+MPS=1S=I(2)Multiplier in a closed economyI= S=MPS YY= I/MPS k=1/(1-MPC) MPC=c k=1/(1-c)3. Incom

5、e determination in a small open economySmall open economy(1)Import functionM=M0+mY m=MPM= M/ Y(2) Determination of the equilibrium national income in an openY=C+I+X-M I+X=S+Mdomestic balance of trade was determined by real exchange rate, domestic and foreign incomeB=B0-mY B0 automatic balance relate

6、d to p and Y*3. Income determination in a small open economy(3)Foreign trade multiplierI+ X= S+ M Y= (I+ X)/(MPS+MPM)k=1/(MPS+MPM)=1/(s+m)=1/(1-c+m)OrY=C+I+X-M=C0+cY+I+X-M0-mYY=(C0+I+X-M0)/(1-c+m)3. Income determination in a small open economyTrade surplus: export makes the income increase, the role

7、 like the consumption and investment .Trade deficit: income multiply reducesThe foreign multiplier can not adjust trade balance automatically in real world.4.Foreign Repercussionsk”=1/MPS1+MPM1+MPM2(MPS1/MPS2)k” k k=1/1-cWhy ? In the open ,Foreign income increases , foreign import increase , domesti

8、c export increases , compensates for out. 5.Absorption approachIf a country is at the full employment level of output prior to the devaluation,then it is producing all it can already, so that no further output is forthcoming.What happens in this case after a devaluation?The absorption approach empha

9、sizes how domestic spending on domestic goods changes relative to domestic output. 5.Absorption approachThe balance of trade is viewed as the difference between what the economy produces and what it absorbs, for domestic use. Total output Y is written as being equal to total expenditures: Y=C+I+G+(X

10、-M) Define absorption A as being equal to C+I+G, net export as X-M, so X-M=Y-A 5.Absorption approachAbsorption A:total domestic spending. If total domestic production Y exceeds A, the amount of the output consumed at home,the nation will export the rest of its output and run a balance-of-trade surpl

11、us. If YA, the excess of domestic demand over domestic production will be met through imports.5.Absorption approachThe analysis is really broken down into whether the economy is at full employment or has unemployed resources.Full employment: all sources are being used, so that the only way for net e

12、xports to increase is to have absorption fall.With unemployment: Y is not at its maximum possible value, A could remain fixed and Y could increase due to increase in domestic sales to foreigners, X. 5.Absorption approachIn the case of unemployment, Y could increase, so that a devaluation would tend

13、to increase net exports( if the elasticity conditions are satisfied) and bring about an increase in output( given a constant absorption).Full employment: it is not possible to produce more goods and services. If devalue, net export will tend to increase,and the end result is strictly inflation,. Whe

14、n foreigners try to spend more on our domestic production, no increase in output forthcoming, the only result: biding-up of the prices of the goods and services. 5.Absorption approachConclusion: (1)correct trade balance, increase Y,reduce absorption. (2)How devaluation affects the trade balance? In

15、an unemployment: income effect Y,(3)Devaluation affects on income(4)Devaluation affects absorption (5)Shortcoming: only in a world without capital flows. 6.Monetary adjustments and synthesis of the automatic adjustmentsA change in the money supply affects BP through both interest rate changes and ch

16、anges in internal prices. In the long run the automatic monetary price adjustment mechanism could by itself eliminate the trade deficit and unemployment.In flexible, depreciation will correct part of deficit, the deficit leads to a reduction in the nations money supply and increases its interest rate. Investment, income, imports fall and deficit reduces, also reduces capital inflow.Sacrifice internal to external balance.Key wordsAbsorption approachForeign trade multi