Week 1 Term 1

Question 1

What is the trade balance?

Answer 1

TB = Good Balance + Services Balance

Goods Balance = Goods exports - goods imports

Service balance = Service exports - goods imports.

Question 2

What was the global trend of global imbalances?

Answer 2

• Up until the mid 1990s countries had 0 trade balance but then started trading and USA, UK have trade deficit.
  China and Germany have trade surplus.

Question 3

What is the income balance?
How is it split up

Answer 3

Income that flows in due to repayment of factors of production.

IB = Net investment income + Net international payments to employees.

Net investment income is in terms of capital
Net international payments is in terms of labour.

Question 4

How has the global trend of Income balance been

Answer 4

Once again, Mid 90s countires increased exposure to international markets through income.

Question 5

What are net unilateral transfers?

Answer 5

Net Unilateral Transfers = Private Remittances + Government Transfers.

Question 6

What is the current account and why is it important?

Answer 6

CA = TB + IB + NUT

-important because is CA is negative external debt to world increases.
-If CA is positive the external debt falls.

Question 7

Does Trade Balance always move in tandem with Current Account?

Answer 7

-If you map out the 45* line countries like US, have neg CA and Neg TB.
Whilst China have pos CA and Pos TB.

Phillipines is an outliar as TB is negative whilst CA is positive because: Net Unilateral Transfers is high as many fillipinos send money back.

Question 8

What is an important feature about the Current Account?

Answer 8

Current Acccount US + Current Account ROW = 0

If there are two countries they have the mirror image of each other’s current account.

Question 9

If we look at the world map what do we see about CA?

Answer 9

USA, UK and Mediterenean countries have been running large CA.

China, Germany and OIl exporters have been running CA surplus.

Question 10

What is the Net International Investment position?

What type of concept is NIIP?

Answer 10

• NIIP = Foreign Assets - Foreign Liabilities
• If NIIP is negative country has debt.
  -If NIIP is positive country is creditor.

NIIP is a stock concept.

Question 11

What is the change in Net International INvestment position?

Answer 11

change NIIP = Current Account + Valuation Change.

Question 12

Why are valuation changes relevant for the NIIP?

Answer 12

As NIIP is assets - liabilitiies

-Whilst quantity of assets and liabilities may not change
-But the value of NIIP may change as prices of assets and liabilities fluctuate due to prices.

Question 13

What is a Caveat for Valuation Changes?

Answer 13

• Depends the quantity of assets as the bigger the level of assets the VC has a bigger impact.

Question 14

Graphically how can you see the importance of Valuation Changes?

Answer 14

-If map valuation changes to current account they should line up on 45* angle.
-However, as valuation changes are big these shift it off the 45* line.

Question 15

How could you construct a hypothetical NIIP for year 2000 (removing VC?)

When constructing this for US what does it show?

Answer 15

NIIP(2000) = NIIP(1999) + CA(2000)

Actual NIIP was above hypotehtical NIIP which shows US benefitted from valuation changes.

Question 16

What would happen to US NIIP if dollar depreciates?

Answer 16

Means that the US debt would shrink.

As most US liabilities are in dollar.

Question 17

What would happen to US NIIP if ROW stock market outperforms US Stock Market?

Answer 17

• US assets held by foreign nationals would decrease in value and would hence de- value.

Question 18

What is the negative NIIP positive NII Paradox?

Answer 18

-If you negative NIIP (debtor) to rest of the world you would expect to have to pay it back.
-However, countries like US still have positive NII.

Question 19

What are the two explanations for the Negative NIIP positive NII paradox?

Answer 19

-Dark Matter theory
-Return Differentials.

Question 20

1.How do you calculate the total dark matter?

2.What is a criticism of this?

Answer 20

1.First you work out TNIIP

Do this by NII = rTNIIP

solve for TNIIP

Then dark matter = TNIIP - NIIP

2. This gives extremely large numbers that are not sensible.

Question 21

What is the Dark Matter Theory?

Answer 21

This is intangible unnacounted for things that create income.

Eg if US Mcdonald sets up in Italy, the land and property would be paid for.

However, the brand name that is productive and gains income is not accounted for.

Question 22

What is the theory of return differential?

Can you illustrate this with the context of the US?

Answer 22

-If NIIP is negative Liabilities > Assets

-To make NII positive

• Large amount of liabilities has small returns
  -Smaller amount of risky assets has higher return.

2. US assets are mainly highly remunerative risky stocks
   Whilst its liabilities are low risk US treasury bills.

Question 23

How would you work out return differentials?

What could this cause?

Answer 23

NII = rA . A + rB . B

Then work out rA and rB

Then work out the difference of these two things

2. Even a small Interest rate differential could cause paradox