國(guó)際金融學(xué)theory-of-balance-of-payments課件

ContentsNationalIncomeAccountBalanceofPaymentsAccountAssignments1ContentsNationalIncomeAccounNationalIncomeAccountI.IdentitiesinaClosedEconomyY=C+I+G[*]Where,Y,C,I,andGdenoteoutput,consumption,andgovernmentexpenditurerespectively.NationalincomecanalsobedividedintoC,Sp(privatesaving),andT(taxes),thus,Y=C+Sp+T[**]Thetwomeasuresareequivalent,henceY=C+I+G=C+Sp+T2NationalIncomeAccountI.IdenAfteraverysimplemanipulation,onecaneasilyobtain,I=Sp+(T-G)Where,(T-G)intherighthandisgovernmentsaving(Sg).Therefore,I=S=Sp+SgThisistheidentitywearequitefamiliarwith.II.IdentitiesinanOpenEconomyII.1WhatIsOpenEconomy?Crossbordermovementsofcommodity,capital&labor.NationalIncomeAccount3AfteraverysimplemanipII.2InternationalFlowsofCommoditiesIdentityLetXrepresentexports,Mrepresentimports,Y=C+I+G+X-MWhere,X-Misalsoreferredtoasnetexportortradebalance(acaseofChinaisillustratedinFigure1-1-1).

OpennessofTrade:Openness=(X+M)/Output%AnexampleispresentedinFigure1-1-2.AnimaginaryexampleNationalIncomeAccount4II.2InternationalFlowsofCoFigure1-1-1China’sNetExportSource:NBSC;in100millionRMB5Figure1-1-1China’sNetExporFigure1-1-2China’sOpennessSource:NBSC;in100millionRMB&%6Figure1-1-2China’sOpenness6Animaginaryeconomy,Agraria,whoseonlyoutputiswheat.Eachcitizenisaconsumerofwheat,andalsoafarmer.Farmersinvestbyputtingasideaportionofeachyear’scropasseedforthefollowingyear’splanting.ThereisalsoagovernmentthatappropriatespartofthecroptofeedtheAgrarianarmy.Agraria’stotalannualcropis100bushelsofwheat.Agrariacanimportmilkfromtherestoftheworldinexchangeforexportsofwheat.WecannotdrawuptheAgrariannationalincomeaccountswithoutknowingthepriceofmilkintermsofwheat.Assumethepriceofmilkis0.5bushelofwheatpergallon,andAgrarianswanttoconsume40gallonsofmilk,thenitsimportsareequalto20bushelsofwheat.

NationalIncomeAccount7Animaginaryeconomy,AgrSource:KrugmanandObstfeld(2003),pp.300-301.Thetablebelowpresentsasimplecalculationofthecountry’snationalincomeaccount.Consumptionisdividedbetweenwheatandmilk,with55bushelsofwheatand40gallonsofmilk(20bushelsofwheat)consumed.25bushelsofwheatareinvested,10arepurchasedbythegovernment,and10areexportedabroad.NationalIncomeAccount8Source:KrugmanandObstfeld(II.3AGlimpseofOutputComponentsConsumptionThelargestcomponentofacountry’soutput(seeFigures1-1-3and1-1-4foranillustrationofboththeU.S.andChina’sconsumptionsshares).IntheU.S.theshareofconsumptionintheGDPrangesfrom62-70%eversincetheKoreanWar.Chinaisalittlebitlower,however.ItseemsthattheU.S.hasbeenconsumingtoomuchwhileonthecontrary,Chinesehasbeenconsumingtoolittlesince1970s.NationalIncomeAccount9II.3AGlimpseofOutputCompoInvestmentIntheU.S.,(gross)investmenthasfluctuatedbetween12and19%ofGNPinrecentyears(Figure1-1-4).However,itisquiteanotherpictureforChina.AswecanseefromFigure1-1-3orTable1-1-2,thereexistsaphenomenoncalledoverheatedinvestmentinChina,whichisamaincontributortoChina’soverheatedeconomynowadays.Noticealsothatinvestmenthereisnecessarilydifferentfromthetermcommonlyusedinfinance!NationalIncomeAccount10InvestmentNationalIncomeAccoGovernmentPurchasesAswecanseefromFigures1-1-3and1-1-4,thereisnosignificantdifferencebetweenthetwoeconomy.NetExportFigure1-1-4tellsusthatsincethemid1970s,theimportshavebeenoverrunningtheexportsintheU.S.Question:Isthereanylinkagebetweentheconsumptionandnetexportinanopeneconomy?NationalIncomeAccount11GovernmentPurchasesNationalIFigure1-1-3ComponentsofChina’sGNPSource:NBSC;inpercentage12Figure1-1-3ComponentsofChiFigure1-1-4ComponentsoftheU.S.GDPSource:Dept.ofCommerce;inpercentage13Figure1-1-4ComponentsoftheTable1-1-1ContributionsofC,I,&NetExportsSource:NBSCNote:Cincludesbothprivateconsumptionandgovernmentconsumption(G).14Table1-1-1ContributionsofCIII.GNP&GDPinanOpenEconomyWhencapitalandlaborfactorscanflowoutside,thedifferencebetweenGNPandGDPemerges.III.1WhatIsGNP?

GrossNationalProduct(GNP)isthemarketvalueofallfinalgoodsandservicesproducedbyacountry’sfactorsofproductioninagiventimeperiod.Itisabasicmeasureofacountry’snationalincome.Usually,“theGNPacountrygeneratesoversometimeperiodmustequalitsnationalincome,theincomeearnedinthatperiodbyitsfactorsofproduction.”(SeeKrugmanandObstfeld(2003,p.296)forasimpleexplanation)NationalIncomeAccount15III.GNP&GDPinanOpenEconIII.2WhatIsGDP?

GrossDomesticProduct(GDP)issupposedtomeasurethemarketvalueofproductionwithinacountry’sborders.III.3WhatIstheDifference?Inaclosedeconomy,GDPequalsGNP.Inanopeneconomy,GNPequalsGDPplustheincomeearnedbyacountry’sresidentsinothercountrieslessthoseearnedbyothercountry’sresidentsinthedomestic.NationalIncomeAccount16III.2WhatIsGDP?NationalIncForsimplicity,wemayhave,GNP=GDP+NFPWhere,NFPistheincomeofnetfactorproduction.“Asapracticalmatter,movementsinGDPandGNPusuallydonotdiffergreatly.”(Krugman&Obstfled,p.298)AnillustrationoftherelationandtheslightdifferencebetweenGNPandGDPcanbefoundinTable1-1-2.Note:WewilluseGNPinthecoursehereafter.NationalIncomeAccount17Forsimplicity,wemayhaTable1-1-2China’sGDP,GNP&NFPSource:NBSC;in100millionRMB18Table1-1-2China’sGDP,GNP&IV.CurrentAccountAnalysisIV.1CurrentAccount,Import&ExportForcountrieslikeChina,netexportisamajorcomponentofthecurrentaccount(SeeFigure1-1-5).Inotherwords,ifweneglectNFP,currentaccountequalstothenetexport.LetCAdenotecurrentaccountbalance,thus,CA=X-M,ifNFP=0SeealsoFigure1-1-5.NationalIncomeAccount19IV.CurrentAccountAnalysisNa05000010000015000020000025000030000002468101294959697989900010203040506CANEXRATIOFigure1-1-5China’sCurrentAccountSource:NBSC;inmillion$and%20050000100000150000200000250000IV.2CurrentAccount&DomesticAbsorptionAswehaveknownthat,Y=C+I+G+X-M,ifNFP=0Intherighthandoftheidentity,C,I,andGconstitutesthegrossexpendituresofacountry’sresidents.WeuseAhereinaftertorepresentthisitem,wethenobtain,A=C+I+GInthisway,currentaccountcanalsobeviewedastheabstractionofnationalincomeandabsorption.CA=Y-ANationalIncomeAccount21IV.2CurrentAccount&DomestiWhatcanwelearnfromCA=Y-A?Conclusions:Theidentitysimplymeansthatinanopeneconomy,acountry’sincomemustnotequaltothedomesticexpenditures,whichshouldbeholdintheclosedeconomy.Alsothistellsusthatinanopeneconomy,resourcescanbeallocatedinternationally.Table1-1-3showstherelationsamongthesevariablesinChina.WhereYisapproximatedbyGDP,andcolumn8iscalculatedaccordingtotheidentity.Wecanseethatitisthesametothetimeseriesdataincolumn6.NationalIncomeAccount22WhatcanwelearnfromCA=Y-A?Table1-1-2China’sAbsorption&IncomeSource:NBSC;in100millionRMB23Table1-1-2China’sAbsorptionIV.3CurrentAccount&InternationalInvestmentPosition(IIP)

InternationalInvestmentPositionIdentity:CAt=NIIPt-NIIPt-1InternationalInvestmentPositionmeansthatacountrymaycontinuetobeinadeficitpositiononthecurrentaccountinacertaintimeperiod,butitcannotenjoythisforever.Thisprobablycouldbebestillustratedbytheso-calledPonzigame.SeeFigure1-1-6foranillustration.IV.4CurrentAccount,Saving&InvestmentAswehaveseen,Y=C+I+G+X-M=C+Sp+TNationalIncomeAccount24IV.3CurrentAccount&InternaFigure1-1-6U.S.CurrentAccount&NIIPSource:BureauofEconomicAnalysis(inbillionsofdollars)25Figure1-1-6U.S.CurrentAccoBysimplemanipulation,wehave,CA=S-I,orS=I+CANoteagain:Sisnotthemoneydepositedinthebankingsystem,butthereminderofnationalincomelessconsumptionandgovernmentpurchases,i.e.,S=Y-C-G.Conclusion:Anopeneconomycansaveeitherbybuildingupitscapitalstockorbyacquiringforeignwealth,butaclosedeconomycansaveonlybybuildingupitscapitalstock(KrugmanandObstfeld,2003,p.304).NationalIncomeAccount26Bysimplemanipulation,wWemaydivideSintoprivatesavingandgovernmentsavingformeaningfulresearches.

PrivateSavingisdefinedasthepartofdisposableincomethatissavedratherthanconsumed.Privatesaving,denotedbySp,canbeexpressedasSp=Y-T-C

GovernmentSavingisdefinedasthegovernmentincomelessitsconsumption.LetSgstandforgovernmentsaving,then,Sg=T-GNationalIncomeAccount27WemaydivideSintoprivThetwotypesofsavingwehavedefinedaboveadduptoacountry’snationalsaving,i.e.,S=Sp+SgFinally,wecanredefinetherelationamongcurrentaccount,saving,andinvestmentinanopeneconomy,CA=(Sp-I)+(T-G)NotealsothatSisnotdirectlypresentedbystatisticalyearbooksinChina,butmaybeestimatedbytheidentitiesweoffer.Andsee“casestudy”inthetextbookon307foradiscussionontheU.S.vs.Japan.NationalIncomeAccount28ThetwotypesofsavingwI.BalanceofPayments

Acountry’sBalanceofPaymentskeepsrecordofeconomictransactionsbetweenacountry’sresidentsanditsnon-residentsinagiventimeperiod,usuallyinayear.

Weshallpayspecialattentiontothefollowingconcepts:I.1Flowvs.StockI.2Residentvs.Non-residentTheInternationalMonetaryFund(IMF)haseverofferedanexplanationtotheconcept.BalanceofPaymentsAccount29I.BalanceofPaymentsBalanceSeestipulationsbytheIMFinthefiftheditionof“BalanceofPaymentsManual”on21.I.3EconomicTransactionsEconomictransactionsaremadeupofthefollowingfivecomponents:TransactionsamongfinancialassetsandgoodsandservicesBartersTransactionsamongfinancialassets,suchassecuritiestradingUnilateralgoodsandservicestransferUnilateralfinancialassetstransferBalanceofPaymentsAccount30SeestipulationsbytheIII.BasicAccountingPrinciplesII.1ExamplesofPairedTransactionsDouble-entrybookkeeping:e.g.1-1-1.ImagineyoubuyatypewriterfromtheItaliancompanyOlivettiandpayforyourpurchasewithaRMB1,000check.Thetransactionsmayberecordedasfollows.Source:KrugmanandObstfeld(2003).BalanceofPaymentsAccount31II.BasicAccountingPrinciplee.g.1-1-2.SupposeduringyourtravelsinFrance,youpayRMB200foradinnerattheRestaurantdel’Escargotd’Or.Youplacethechargeonyourcreditcard.Thetransactionsmayberecordedasfollows.Source:KrugmanandObstfeld(2003).BalanceofPaymentsAccount32e.g.1-1-2.Supposedurie.g.1-1-3.Financialaccounttransactions.ImagineyouruncleSidbuysanewlyissuedshareofstockintheU.K.oilgiantBritishPetroleum(BP).Heplaceshisorderswithhisstockbroker,payingRMB95.Source:KrugmanandObstfeld(2003).BalanceofPaymentsAccount33e.g.1-1-3.FinancialaccoBalanceofPaymentsAccounte.g.1-1-4.SupposeChina’sbanksforgiveRMB5,000indebtowedtothembythegovernmentoftheimaginarycountryofBygonia.Inthiscase,ChinamakesaRMB5,000capitaltransfertoBygonia,whichappearsasa–RMB5,000entryinthecapitalaccount.Theassociatedcreditisinthefinancialaccount,intheformofaRMB5,000reductioninChina’sassetsheldabroad.Source:KrugmanandObstfeld(2003).Also,seethetablebelow.34BalanceofPaymentsAccountII.2CurrentAccountCurrentaccountreflectstheinternationaltransferofrealresourcesintheeconomy.“Specifically,themajorclassificationaregoodsandservices,incomeandcurrenttransfers.”Goods(visibletrade)andservices(invisibletrade)Income.Theitembasicallyincludescompensationofemployees,andinvestmentincome

CurrentTransfersaredistinguishedfromcapitaltransfers,whichareincludedinthecapitalandfinancialaccountBalanceofPaymentsAccount35II.2CurrentAccountBalanceofII.3CapitalandFinancialAccountCapitalAccount.Themajorcomponentsoftheaccountarecapitaltransfersandacquisition/disposalofnon-produced,non-financialassets

Capitaltransfersinclude(i)transfersofownershipoffixedassets,(ii)transfersoffundslinkedto,orconditionalupon,acquisitionordisposaloffixedassets;(iii)forgivenessorcancellation,withoutanycounterpartsbeingreceivedinreturn,ofliabilitiesbycreditors.FinancialAccountTheitemincludesdirectinvestment,portfolioinvestment,otherinvestmentandreserveassetsBalanceofPaymentsAccount36II.3CapitalandFinancialAccII.4Errors&OmissionsAccount“Inpractice,however,whenallactualentriesaretotaled,theresultingbalancewillalmostinevitablyshowanetcreditoranetdebit.Thatbalanceistheresultoferrorsandomissionsinthecompilationofstatements.”Refertothedocument“usinternationaltransactions”andTable1-1-3andTable1-1-4forasurveyofboththeU.S.andChina’sBalanceofPaymentsin2006.II.5BalanceofPaymentsIdentityCurrentAccount+CapitalAccount+FinancialAccount=0BalanceofPaymentsAccount37II.4Errors&OmissionsAccounTable1-1-3China’sBalanceofPaymentsof2006Source:SAFE,inthousandsofUS$BalanceofPaymentsAccount38Table1-1-3China’sBalanceofIII.AnalysisoftheBalanceofPaymentsIII.1TradeBalanceAmeasureofrealresourcetransfers,thedevelopmentoftheeconomy,andthebalanceofpayments.III.2BalanceofCurrentAccountWhentheaccountisinsurplus,thebalancemustberealizedbythenetoutflowofcapitalortheincreaseinofficialreserves.Theexactreversealsoholds.BalanceofPaymentsAccount39III.AnalysisoftheBalanceoIII.3BasicBalanceTheitemistheoutcomeoftransactionsofcurrentaccount,long-runcapitalflows.Italsoreflectsthelong-termtrendofacountry’sstatusofbalanceofpayments.III.4OfficialSettlementsBalanceTheitemalsoincludestheshort-termcapitalflows.III.5OverallBalanceAllthetransactionsexceptofficialreservesarelistedintheonlineaccounts.ItisanestimationoftheimbalanceofbalanceofpaymentsbychangingofficialreservesandisalsosuggestedbytheIMFintheanalysis.BalanceofPaymentsAccount40III.3BasicBalanceBalanceofIV.China’sBalanceofPayments:AGlimpseSeeFigure1-1-7andTable1-1-4forasurvey.IV.1CurrentAccountIV.2CapitalAccountIV.3ReservesIV.4Errors&OmissionsBalanceofPaymentsAccount41IV.China’sBalanceofPaymentFigure1-1-7-1China’sBalanceofPaymentsSource:SAFE;inmillionUS$42Figure1-1-7-1China’sBalanceFigure1-1-7-2China’sBalanceofPaymentsSource:SAFE;inmillionUS$Whathappened?Whathappened?Whathappened?43Figure1-1-7-2China’sBalanceTable1-1-4China’sBalanceofPaymentsSource:SAFE;inmillionsofUS$44Table1-1-4China’sBalanceofAssignmentsReadthe“ReportonChina’sBalanceofPayment”from2005to2007foradetailedsurveyandanalysisofChina’sbalanceofpaymentsinrecentyears.ReadChapter12ofthetextbook.WhatcanwelearnfromFigure1-1-7andTable1-1-4?Estimatetradebalances,currentaccountbalances,basicbalances,andoverallbalancesofChinasince1985usingdatareleasedbytheSAFE.45AssignmentsReadthe“ReportonAttached46Attached46ContentsElasticityApproachMultiplierApproachAbsorptionApproachMonetaryApproachAnoverallCommentsAssignments47ContentsElasticityApproach47

ElasticityApproach,focusesontheroleofexchangeratechangesuponacountry’sbalanceofpaymentsprovidedthatincomeandpricesaregiven(partialequilibriumanalysis).I.HowDoesExchangeRateMatter?

Thechangesofexchangeratewillhaveanimpactuponacountry’sexportsuppliesanddemands,basicallythroughthechangesofrelativepricesbetweendomesticproductsandforeignproducts,andbetweentradable(exportsandimportsubstitutes)andnon-tradablegoods.Thisistheso-calledexpenditure-switchingeffect.ElasticityApproach48ElasticityApproach,focLetPdstandforthepriceofdomesticproducts,Pfpriceofforeigngoods,andStheexchangerate,expressedasthehomecurrencypriceperunitofforeigncurrency.Wewillturntothedeterminationofexchangeratelater.Thuswemayobtaintherelativepriceofaforeigngoodsdominatedinhomecountry’scurrency.LetRPdenotetherelativeprice.RP=SPf/PdElasticityApproach49LetPdstandfortheprice.g.1-2-1SupposeChinesejeanscostingRMB2000,andU.S.sweaterscosting$250.Againsupposetheexchangerateis$1=RMB8.27.Thefollowingtablepresentsanimaginedsituationofthechangesofexchangerateandrelativeprices(AcasefromKrugmanandObstfeld(2003)).Exchangerate8.308.358.408.45Pairsofjeans/sweater1.03751.0441.051.056Conclusion:Allelseequal,anappreciationofacountry’scurrencyraisestherelativepriceofitsexportsandlowerstherelativepriceofitsimports.Conversely,adepreciationlowerstherelativepriceofacountry’sexportsandraisestherelativepriceofitsimports.ElasticityApproach50e.g.1-2-1SupposeChineseII.AssumptionsIncomeandprices(PfandPd)areconstant,bothhomeandforeignconsumers’preferencesarealsoconstantCompleteimmobilityofcapitalIgnoringdynamiceffectofthedepreciationandusingcomparativestaticequilibriumapproachInfiniteelasticityofsupplyofimportsandexportsAsmallopeneconomymodel(SOE)ElasticityApproach51II.AssumptionsElasticityApprIII.AnalysisIII.1DefinitionsLetS,denoteexchangerateX,exportvolume

M,importvolumeB,currentaccountbalancedenominatedinhomecurrency.Sincethereisnocapitalmobilityatall,Balsomeansacountry’soverallstatusofbalanceofpayments.B=PdX-SPfMElasticityApproach52III.AnalysisElasticityApproaLetalsoX

andM

standfortheexchangerateelasticityforexportandimportdemandsrespectively.Recallthedefinitionofelasticitywehavelearnedinmicroeconomictheory,wewilleasilywrite,Note,whydoweuseanegativesignbeforetheexchangerateelasticityforimports?ElasticityApproach53LetalsoXandMstandIII.2ABriefDerivationSupposethathomecountry’scurrencydepreciate,say,theexchangeraterisesfromStoS+S.ThedepreciationwillleadtothechangesinexportsandimportsbyXandMrespectively.BeawarethatX>0andM<0(Why?).Thenewbalanceofpayments,letBnewdenoteit,willbe,Bnew=Pd(X+X)-(S+S)Pf(M+M)Thuschangeofbalanceofpaymentsis,B=Bnew-B=PdX-PfMS-PfS(M)-Pf(M)(S)ElasticityApproach54III.2ABriefDerivationElastiAsimplemanipulationarrivesat,SincedepreciationmeansS>0,depreciationwillleadtotheimprovementofacountry’sbalanceofpaymentsif,andonlyif,ElasticityApproach55AsimplemanipulationarriAgain,supposetheinitialbalanceofpaymentsisinequilibrium,whichmeansthat,B=PdX-SPfM=0.Substitutethisequationintotheconditionwehavealreadyobtained,X+M>1ThisinequalityisthefamousMarshall-LernerCondition(Bickerdicke-RobinsonCondition,tobeexact),whichtellsustheconditionunderwhichthedepreciationofacountry’scurrencymayleadtotheimprovementofthecountry’sbalanceofpayments.AsomeinterestingexampleofChinaisillustratedinTable1-2-1.ElasticityApproach56Again,supposetheinitiTable1-2-1RMBRateandTradeBalanceSource:SAFE;NBSC;in100millionsofRMB57Table1-2-1RMBRateandTradeIII.3TestsonChina’sM-LConditionFormoreresearchesonthetopic,seeJinandZhouforadetailedsurveyoftheliterature.ElasticityApproach58III.3TestsonChina’sM-LConIV.CommentsTakingsubstitutioneffectintoconsiderationonly,butignoringincomeeffect.Theassumptionthatcapitaliscompletelyimmobileisnotrealistic.Eversince1980s,internationalcapitalflows,esp.,hotmoney,havebeenmoreandmoreprevailing.Ignoringthedynamiceffectofdepreciation.Whentheeffectistakenintoaccount,theso-calledJcurveeffectemerges.

SeealsosectionV.2andTable1-2-2.SOE.Hence,thetheorymaynotbeapplicabletolargereconomies.AmoregeneralconditionmaybefoundinGandolfo(2002),chapter7.ElasticityApproach59IV.CommentsElasticityApproacTable1-2-2EstimationsoftheM-LConditionSource:KrugmanandObstfeld(2003)60Table1-2-2EstimationsoftheV.ExtensionsV.1TheRoleofIncome&OthersIfincomeeffectistakenintoaccount,thentheconditionfordepreciationtoimprovethebalanceofpaymentsis,X+M>1+mThisiscalledHarberger-Laursen-MetzlerCondition.Iftheforeignrepercussionsarealsoconsidered,thentheconditionshouldberemediedagain,X+M>1+m+m*

Where,m*denotesthemarginalimportpropensityofforeigncountry.ElasticityApproach61V.ExtensionsElasticityApproaBickerdike-Robinson-MetzlerConditionWhere,eXandeMdenotethesupplyelasticityofhomecountry’sexportsandimportsrespectively.

Thisisageneralcondition.SeeGandolfo(2002)foradetailedproofoftheformula.ElasticityApproach62Bickerdike-Robinson-MetzlerCoV.2

TheJCurveEffectThedepreciationordevaluationmaynotleadtotheimprovementofthehomecountry’sbalanceofpaymentsintheshortrun.Thebalanceofpaymentsmaydeteriorateatfirstandafteratimeperiodgetimproved.

tBPElasticityApproach63V.2TheJCurveEffecttBPElast

S.P.Magee(1973)classifiedthetimeperiodafterdepreciationordevaluationintothreesub-periodstoinvestigateintothedepreciationordevaluationeffects.

Theperiodsareasthefollowings.Currency-ContractPeriod.BothpricesandvolumesoftradekeepunchangedPass-throughPeriod.PriceschangewhilevolumeskeepconstantQuantityAdjustmentPeriod.BothpricesandvolumeschangeElasticityApproach64S.P.Magee(1973)classiI.AssumptionsCompleteimmobilityofcapitalPricerigidity(includingexchangerate&interestrate)IdleresourcesII.WhatIsItAbout?Theroleofincome(Y)intheadjustmentofbalanceofpaymentsprovidedthattheexchangerateandpriceskeepconstantorunchanging.Importissubjecttonationalincome(M=M0+mY).Changesinautomaticexpenditures(C0+I0+G0)influencenationalincomebymultipliereffectandhaveanimpactonimportexpenditures.

MultiplierApproach65I.AssumptionsMultiplierApproIII.BriefDerivationsIII.1AggregatedemandsinanopeneconomyAD=C+I+G+X-MWedefinebehaviorequationsasfollows,C=C0+cYd,where0<c<1(Why?)AndYd=Y-T+TRTandTRaretaxesandgovernmenttransfers.Hereweignorethetwofactorsforconvenience.ThosewhoareinterestedintheproblemarestronglyrecommendedtorefertoGandolfo(2002),chapter8formorecomplicateddiscussions.MultiplierApproach66III.BriefDerivationsMultiplInsum,wehave,C=C0+cYRegardingprivateinvestment,I,wesimplyassumeitisanexogenousvariable.I=I0Asofimport,wemaytakethefollowingequationastheeconomictheorywouldpossiblysuggest.M=M0+mY,0<m<1Finally,wesimplyassumeexportandgovernmentpurchasesareexogenouslydetermined.MultiplierApproach67Insum,wehave,MultipliX=X0,andG=G0Byaddingupallthecomponents,weobtainthesimpleformofaggregatedemandinanopeneconomy,AD=C0+I0+G0+(X0-M0)+(c-m)YAggregatedemandconvergestoaggregatesupply,inequilibrium,AD=Y,Then,MultiplierApproach68X=X0,andG=G0MultiplierAppro

MultiplierApproachLetusfirstdenoteA=C0+I0+G0Y=[1/(1-c+m)](A+X0-M0)

Where,

1/(1-c+m)iscalledforeigntrademultiplier.AsimpleestimationforChinaispresentedinFigure1-2-1.Sincethereisnomobilityofcapitalandpricerigidity,balanceofpaymentsequalstothebalanceofcurrentaccountB.B=X0-(M0+mY)=(1-c)/(1-c+m)(X0-M0)-m/(1-c+m)ASupposeotherexogenousvariablesbeingconstant,wemaystudytheimpactofchangesinautomaticexportX0onthebalanceofpayments,69 MultiplierApproachLetFigure1-2-1China’sForeignTradeMultiplierSource:Author’sestimation.Whathappened?1/(1-c+m)=1/(s+m)70Figure1-2-1China’sForeignTIII.2AnIncreaseinX0Underthecircumstance,Bequalsto,Theequationshowsthatanincreaseinexportwillleadtotheincreaseinthebalanceofcurrentaccount.However,themarginislargerthanthatofthecurrentaccount.Alsowecanusethesamereasoningtoanalyzetheinfluenceofotherexogenousvariablesuponacountry’sbalanceofpayments.Butremember,balanceofpaymentsinthiscaseequalstothecurrentaccountbalance.MultiplierApproach71III.2AnIncreaseinX0MultiplIII.3AnIncreaseinM0Perfectsubstitutionbetweendomestic&foreigngoodsSupposeanincreaseinM0,sayM0.Inthiscase,C0+I0+G0keepsunchanged.C0+I0+G0increasesbythesameamountInthiscase,M0=(C0+I0+G0).B0=-M0

MultiplierApproach72III.3AnIncreaseinM0MultiplAmorecommoncaseDefine(C0+I0+G0)=M0,where,

[0,1]Itcanbeeasilyseenthat,MultiplierApproach73AmorecommoncaseMultiplierATable1-2-3BriefSummarizationNotes:multipliersinthebracket.