Balance of payments
Balance of payments
Within which she is political economic, the Balance of payments, is considered like a stabilizing or conjunctural policy, and its balance constitutes one of the main targets, along with the stability of price and use, this balance is considered like `'external balance ''.
Within this context, it agrees to make notice what is a conjunctural economic policy or to differentiate it from a structural policy.
The conjunctural policy, makes reference, to the responsibility that assumes the government of regulating and controlling the economy. This regulating action, is one of the political but important results of the intellectual revolution generated by the General Theory of Those who, it is concretely carried out but on the volume and the structure of the added demand, with a short term perspective, that is to say, the decisions of the government affect short term the following aspects of the economy:
- The rate of variation of the level of prices.
- The volume of unemployment.
- The Balance of payments.
But this class of policy cannot become on the base of three types different from actions or policies, directed to each one of them, but through a complex process of interaction, in which the added demand constitutes the intermediate bound or variable instruments, an example of how this is handled is the following one; an increase of the rate of growth of the total demand accelerates the level of prices, it reduces the unemployment level, and causes an action of deficit sign in the balance of payments.
In which one talks about the structural policy, it is sent to problems but of bottom, qualitative or of structure, this it is a modification of the institutions, social rules custom, norms, laws or standards, that are those that defines in ample sense their economic structure and conditions the performances of the economic agents, their expectations and motivations, when establishing the rights, incentives and duties that frame them and direct towards some social results that are considered desirable.
It can be spoken of two types different from adjustments: the one that place of automatic way takes, via the free forces of the market, and the one that takes place as a result of concrete decisions of economic policies.
Once made the difference between which he is political conjunctural and structural, we will happen to take care of the adjustment gears of the balance of payments in its different approaches or theoretical expositions, of which we will talk about previously to three of the seven, which to my to seem are but the important ones, but, we will make a small analysis of the equation of the Balance of payments, located in the context of curve IS/LM like point to begin with
2. Equation of the Balance of payments.
The equation of the balance of payments we can express it of the following form:
BCC+F
In where its balance (b) is equal to the sum of the balances of the balance of current account
(BCC) and by capital account (f).
The balance of the balance by current account comes determined by the difference between the exports and imports from goods and services.
The function of the real exports of goods and services can be defined of the following form:
Or what is equal
As well, the function of the real imports serious
Therefore
Where
X = Exports in real terms.
M = Imports in real terms.
P = general Level of inner prices.
P* = general Level of outer prices.
And = real National Rent.
Y* = real outer Rent.
And = Type of nominal change, defined as I number of national monetary units to pay by a foreign monetary unit.
R = Type of real par, defined like, that is to say, like indicator of the prices of the goods and services of the country in relation to those of the outside.
The condition of macroeconomic balance can be expressed thus
I + G + X = S + T + M
Or also;
I (i) + G + X (Y*, R) = S [and - T (and), A/P] + T (and) + M (and, R)
That it is the equation of balance IS, in which is known, Is, G, S, T and A/P express the investment, the cost I publish, the real saving, taxes and assets, respectively.
The equation of the balance of payments by expressed current account in national currency would be, then,
BCC = P X (Y*, R) - and P*M (and, R)
Introducing the net entrances of capital of outside (of the nonresident ones) F (i) , where F' >0, would obtain the equation of the balance of payments.
B = P X (Y*, R) - and P* M (and, R) + F (i)
Whose slope can be deduced doing derived total dB = 0.
In effect, being constant Y* and R , we would have:
of where
Since M and is positive and that F' > 0, is clear that the slope throughout B = 0 is positive
Graphically the line of the balance of payments is superposed in the diagram of curves IS/LM.
We observed in the graph that the point of real and monetary balance ( i 0, and 0 ) is below the BP line , of the balance of payments, that appears like a deficit. An increase of the type of interest of i 0 in i 1 would increase the net entrance of capitals until eliminating this deficit, doing compatible the internal balance with the external one.
The fundamental importance of the Balance of payments, is that it gives clear a previous idea us of the explanatory factors, that is to say, of the variables that directly influence and which the authorities can handle, thus will be able to take part like in the type of change (e), to the power to fix the system of parities to use (flexible, fixed or intermediate) and when influencing the quotation of their currency in a while determined (devaluating it, for example), influencing the type of interest (i) and, therefore, on its differential to the outside and the balance of the balance on behalf of capital, through monetary and financial policies, establishing controls and direct obstacles to the imports and/or direct stimuli to the exports, or, finally, through its anti-inflationary policy, directed to the control of P , and, by all means, as he is habitual, by means of a combination of all or some of these measures.
Next we will see the different adjustment gears to carry out these policies, and of which single we will talk about, to the approach of the elasticities, the approach rents, the approach absorption and the monetary approach, that to ours to seem are but the important ones.
3. Adjustment gears of the Balance of payments: Approaches
• The Approach prices or elasticities
This approach is a way to correct or to complete the insufficiencies of the classic and neoclassic approach or the imbalance of the balance of payments through the effect-prices.
Due to the failure of numerous devaluations it did necessary to deepen with respect to the necessary conditions for these alterations of the type of change exerted his positive influence on the trade balance, task in which, among others, the names of A. Marshall, J are outstanding. Robinson and A. Lerner.
In if this approach it offers an analysis to us of which it happens with the Trade balance when a country devaluates its currency, needing the conditions to fulfill so that this measurement is successful in its objective of reequilibrar that.
In this sense it emphasizes the well-known condition of Marshall-Lerner to obtain positive results of a devaluation.
In simple version.
Where foreign B is the measured currency trade balance, with X the physical exports, M the currency imports and p the outer price of the imports. A devaluation improved the trade balance if
Differentiating with respect to p it would be had:
that also it can be written thus:
Since elasticity of demand of import of country that devaluates h m, and that elasticity of demand of import of country or countries remaining (or of export of the country that devaluates), h x as they can be defined of the following form:
The previous equation could be expressed as it is indicated next
Of where it is deduced that
Or also, for a balance initially balanced ( M = pX) ,
That she is the well-known one formulates of Marshall- Lerner.
This condition leans in some restrictive assumptions, of which we will mention three fundamentally:
- Part of the balance of goods and services, that in addition, this initially balanced, and assumes that the supply elasticities are infinite. So that the changes in the demand do not affect the prices, the relative prices single change when doing it the type of change.
- This condition raises the possibility that a devaluation gets worse but that improves the balance of the balance of payments of a country. And, although important problems exist to consider the elasticities of imports and exports, most of the estimations concludes that these elasticities are smaller short term (of 6 - 12 months) that to length (2 years); that is to say, that the Marshall condition - Lerner is not fulfilled in the long term to short but, with which the devaluation gets worse to short the balance, improving it in the long term. In agreement with this effect, the volumes of X and Ms do not vary much to short, so that the country that devaluates receives less income by exports and spends but in imports, which deteriorates their trade balance. Nevertheless, after months, the Xs begin to increase and the Ms to diminish, reason why this balance improves and tends to the surplus.
- One of the greater defects is than it does without the effects on the national rent of the changes in the volumes of the exports and imports.
3,2 Model of Absorption
Model made from a suggestion made by Alexander in 1952 of which an exposition based on considerations on the rent and the added cost is but advisable that the approach of the elasticities.
A situation of external imbalance can be illustrated using some variables
basic of national accounts. In this sense part of the basic identity of accounts
nationals:
Y= C + I + G + X - M
Where:
AND = THE GIP
C = Consumo of homes
I = Investment
G = Cost of government
X = Exports
M = Imports
On the other hand, it is had absorption of the economy will be given by C + I + G ;
that it is not more than total the internal cost of the national residents. For effects of this
relation defines the variable Z that represents the absorption:
- Z= C + I + G
Also, B is defined that will represent the balance of the current account like:
- B = X - M
Combining the defined variables, rescribe the basic identity of the following form:
3. AND - Z = B
The first term ( and - Z ) represents the balance or internal imbalance; And it is the entrance and Z is the internal cost. When and = Z is obtained the internal balance, that is to say, that the national residents spend exactly what they win; and, when and and Z has a situation of internal imbalance.
The second member of the equation represents the external imbalance; when B = 0
it implies that a balance in the current account exists, but B is negative will have
deficit since the imports will be greater than the exports.
Consequently expression 3 allows to visualize the interdependence that exists between the internal and external balance, since, if and then = Z B = 0 . On the other hand, if internal imbalance exists will be external imbalance: if Z is greater than and implies that B is negative, that is, X smaller than M . That is to say, that, since it is consumed more of those than it takes place, is required to go to the financing of the outside, situation that is expressed in a commercial deficit; which, when surpassing the limits considered acceptable by the external financial markets, generates the necessity to resort to an adjustment of the economy. In order to illustrate the dynamics of an adjustment of the external sector, in numeral II of this note models of external sector appear that raise the mechanisms necessary to carry out an adjustment.
This model uses like only and central the mechanism of income, where:
1) The production level is determined by the total level of expenses.
2) The prices are exogenous to the economy of the country.
3) The level of expenses is function (direct) of the entrance level , Z= Z (and).
4) The exports depend (positively) on the level of foreign entrance, Y* ; it is
to say, X = X (Y*).
5) The imports depend (positively) on the entrance level of the country, M = M (and).
As the level of production of the economy is determined by the total demand,
then, the balance in the market of goods is given by:
- And = Z (and) + X (Y*) - M (and)
Recomposing terms it is had:
- Y-Z (and) = B = X (Y*) - M (y)
In expression 2 it is observed that the first term represents the internal balance and
second the external balance. It is important to notice that the only mechanism of which has the economy the country to establish the internal or external balance is the variable and (level of income of the economy of the country)
AND - Z
Graph: Model of Absorption
Details of the Graph:
In the graph the relations corresponding are represented simultaneously to
internal imbalance (and - Z) and external (b). The intersection between (and - Z) with (b) where is point Q , provides the level of existing Y1 balance in the market of goods of the economy of the country. At this level of balance in the market of goods a deficit in trade balance represented by the distance of Y1 exists Q . In the mentioned deficit Z is had and - < 0 , that is that the level of internal cost is greater than the entrance level.
According to the absorption model, if it is wanted to eliminate external imbalance existing Y1Q would be precise to reduce the level of absorption Z ; and, to reduce this level of absorption it would be necessary to compress the entrance level and .
In synthesis, the absorption model illustrates the existence of an inverse relation of compensation between the internal and external balance. In effect, and it represents the level of and
corresponding to the external balance and Yz it corresponds to the internal balance; as it is possible to be appreciated in the graph both points cannot be reached simultaneously.
When trying to obtain the external balance through a contraction of the level of economic activity, the situation of internal imbalance worsens, inasmuch as the reduction of the production increases the leisure level; in other words, the increase of leisure is the cost which there is to incur to manage to eliminate the external imbalance. According to the absorption model, the external adjustment is obtained expenses of the internal adjustment, and vice versa.
3.3 The Monetary Approach of the Balance of payments:
The monetary analysis referring to the adjustment or correction of the balance of payments later leaves from the works of Hahn and the Johnsons, developed by Jones, Mundell, Kemp, McKinnon, Negishi, Parkin and Laidler, Dornbusch, Swoboda, Branson and Mussa.
The monetary approach of the balance of payments proposes, in opposition to the Keynsian theory, that desbalances external is a monetary phenomenon and not a real phenomenon. Consequently, according to this approach, a imbalance in balance of payments is been from a imbalance in the internal monetary market. Nevertheless, in a sense expost, the results of this approach are similar to those of the approach of absorption and the one of elasticities.
In order to previously analyze the interaction of the EMBP with the mentioned models,
part of the identity of the balance of the central bank:
Passive assets
D H
F
Where H is the monetary base or primary money , F is the external component of H
(international reserves) and, D is the internal component of H .
On the other hand, the monetary supply (m) is in favor certain then of a certain one
multiple of H :
1. M = hH = h (F + D)
Where h is the conventional monetary multiplier, that stops effects of analysis of assumes will be 1 (this simplifying assumption does not affect any result).
Taking first differences and rearranging it is had:
- DF = DM - DD
Where DF is the change in reserves, DD is the change in the domestic component of
monetary supply or expansion of the internal credit, and DM is the change in the monetary supply, that in the Literature of the EMBP is known like the demand money flow.
Now, taking the type from change like stable, it is had variation of the amount of international reserves will be equal to the sum of the current account and the account of capitals
of the balance of payments:
3. DF = B + K
where B represents the balance of current account and K the balance of the account of capitals.
If, for example, both accounts were deficit, the country would be losing reserves
international.
Equation 2, explains to us because in the country that is losing reserves, since the expansion of the credit is necessarily greater than the growth of the demand money flow, then, to control a deficit in balance of payments, is needed to control the expansion of the internal credit, since this one is the special mechanism that generates persistent the imbalance external.
3,4 Relation between the approaches elasticities, monetary absorption and.
In order to analyze this relation we can jointly consider following the three groups of basic relations of the balance of payments, all of them certain identities:
Starting off of the national accounts, post is had ex-:
4. AND = Z + B
where Z is the absorption of economy and B represents the balance in current account.
The approach of elasticities, uses the relation:
5. B = X - M
Assuming that the Marshall-Lerner condition is fulfilled, a devaluation affirms that
it improves the balance of the trade balance (b);
On the other hand, the absorption approach affirms that the trade balance can improve
only if the entrance (y) is increased in relation to the level of absorption (z) since according to this approach:
6. B = AND - Z
Now, using the identities from the 2 to the 6 and taking the variables ex- post: it is had
that:
7. DF = B = X - M = AND - TO = DM - DD
One demonstrates so the three approaches are equivalent.
All the models imply that the existence of an external imbalance requires, for their correction of measures that fit the internal demand, that is to say, restrictive policies fiscal and/or monetary.
Bibliography
Martinez Arevalo “the monetary approach of the balance of payments: a recent perspective”.
Harvey, J and Johnson, M. “Introduction to the Macroeconomics”.
Bank of Guatemala. “Political Monetary, Exchange and Credit: Evaluation to November of 2001 and propose one for 2002”.
Luis Bolivar Barragán V.
Alfredo Sabando
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