Providing an in-depth report of all lectures from the macroeconomics course at the university of Warwick. Notes were created by a student who scored a first. They are very detailed and include all the nuances needed for exams.
- International Transactions Accounts = Balance of Payments
o 3 Main Accounts
o Current Account
Trade Balance (goods balance + service balance)
(+) Income Balance = Net Investment Income + Net International Payments to
employees
(+) Net Unilateral Transfers
- To assess the size of the trade balance you’ll have to scale it to the size of the economy
o Calculate the ratio between the Trade Balance and GDP.
T Bt
o =Trade Balance as a % of GDP
GD Pt
- Time Perspective:
o Compute the time series for the trade balance overtime
o Nominal trade value has a limited informational worth so you should compute the trade
balance again as a % of GDP
- General pattern for developed countries – neutral until the 2000s but post 2000s it transforms
largely into a trade deficit (UK, US)
- The Income Balance
o Measures the difference between income received from the RoW and income paid to
the RoW
Net Investment Income -> Net income from capital (dividends, interest, profits)
Net Income from Labor -> Net International Payments to Employees
o Time Perspective (UK) -> Neutral until the 2000s and then experienced larger swings
(positive) as globalization starts to kick in.
o The US runs a trade deficit post-2000s in its trade balance but a trade surplus in the
income balance during the same period.
- Net Unilateral Transfers:
o Keeps a record of the difference between gifts received from the rest of the world and
gifts given to the rest of the world.
o Gifts can involve private agents or governments
o Net Unilateral Transfers = Private Remittances + Government Transfers (including Aid)
- Current Account
o A negative current account (ceteris paribus) means that the net external debt of the
country will increase
,Snapshot (Video 2)
- Observations of the Example
o For the US the trade balance is the main driver of the balance of the current account
o In net terms as a percentage of GDP.
o Trade balance moves closely with the current account
- The Trade Balance and Current Account Balances Across Countries
o
The Net International Investment Position (NIIP) (BoP) (Video 3)
- NIIP = Difference between a country’s foreign Assets (A) and its foreign Liabilities (L)
- If the NIIP is negative -> Country is a net debtor to the rest of the world
- How has the NIIP evolved? (Time perspective)
- The NIIP Changes for 2 Reasons
o ∆ NIIP=CA+Valuation Changes
o VC -> changes in the market valuation of the country’s (A) and (L) (due to appreciation
and depreciation of currency, changes in stock prices)
Depreciation of the Dollar means that liabilities lose value (‘shrink’)
o A positive CA value will indicate that the NIIP is increasing but not necessarily that the
NIIP itself is positive
- How important are valuation changes in the NIIP
o Recall that the NIIP can either change bc of changes to the CA or VC
o Large valuation changes are a recent phenomenon.
Until 2003, the typical change was between –1 and +2 % of GDP.
Since then, we have observed VC as large as 15% of GDP
, - To Compute a Hypothetical NIIP Valuation:
The NIIP/NII Paradox (Video 4)
- Counterintuitively -> Despite the US being the largest external debtor in the world, it receives
investment income from RoW
-
- How can this paradoxical situation happen? - 2 Explanations
o Dark Matter
o Return Differential
- Dark Matter
o The hypothesis maintains that the US net external international investment position is
positive, but the Bureau of Economic Analysis fails to account for that.
o Assuming this -> how much dark matter is there in the NIIP?
TNIIP - True NIIP
o Net Investment income is the return on the True Net International Investment Position
Where r is the interest rate
Take the value of r to be 5%/annum
NII =rTNIIP
NII 0.25
TNIIP= = =5T
r 0.05
Dark Matter is simply the difference between true and recorded NIIP
, According to the dark matter theory the US wouldn’t owe to the RoW -> but
number appears to be too high to be plausible
- Return Differential
o 2nd explanation is motivated by the observation that gross international asset position of
the US is mostly composed of risky but high-return assets, like foreign stocks
o Also, INT. gross Int. L position is composed of safer low-return assets, such as US T Bills
Where A denotes the US Int. Asset position, and Ldenotes its Int. Liability position
NIIP=A−L
Let r A be the return on A and r L be the return on L
o Q is how large does the rate differential on A and L must be to explain the paradox
( 1 ) NII =r A A +r L L
o Why is it that a small rate differential suffices to explain the NII-NIIP paradox?
Gross A and L positions have exploded in the last 3 decades. (Doubling every
decade)
Hence, just a small rate of return diff. Can lead to a positive NII even though the
NIIP is negative
Notes on readings:
Lecture notes in green
Current Account Sustainability:
Sustainability in 2 periods (Video 1):
- Can a country run a perpetual trade balance deficit?
o Depends on whether the country is a net debtor or creditor to the RoW
o Formally: Consider an economy that lasts for two periods. It starts period 1 with a net
¿
foreign asset position of B0. Let r denote the interest rate. Then, the country’s NIIP in P1
¿
is given by r B 0. Let the trade balance be denoted by T B1. Then, the country’s NIIP at
the end of period 1 is given by -
¿ ¿
(1) B1=( 1+r ) B 0 +T B1
Similarly, in period 2:
¿ ¿
(2) B2=( 1+r ) B1+ T B 2
- @ The end of period 2, the country cannot hold assets or debts because no one will be alive in
P3. This means that:
¿
(3) B2=0
o For this statement above we assume that net payments to employees is equal to 0 and
that net unilateral transfers are also equal to 0
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