Essay About Current Account And Latin America

Latin America Economic History Notes
Essay Preview: Latin America Economic History Notes
Report this essay
Latin America and historyWeek 1 Services and goods The higher the urbanization rate in a country, the higher percentage of services it provides in comparison with products/goods it provides.Economically active populationPeople actively searching for work. Effectively it Is the labor factor looking for work. Higher the number generally, higher the quality/effectiveness of work in the country. Exception is Chile/Uruguay. -> Proabably because of level/quality of education.Human development indicatorThe Human Development Report Office releases five indices each year: the Human Development Index (HDI), the Inequality-Adjusted Human Development Index (IHDI), the Gender Development Index (GDI), the Gender Inequality Index (GII), and the Multidimensional Poverty Index (MPI).Week 2In Latin America : Macroeconomics of an open economy Expenditure approachCalculating demand in an economyAggregated demand = Consumption (C) + Investments (I) + Government spending (G) + Trade balance (export (E) – import (M) )X → export of goods and servicesM → import of goods and services Y = C + I + G + [ (X-M) + NY + NCT]Current account (CA) = ( X-M) +NY +NTNY: Net income from aboardNCT: Net current transfersNew EquationY = C + I + G + CACA = Y – [ C + I + G ]CA is the gap between disposable income (Y) and expenditureCA<0⬄ YWhat kind of economic policy should u adopt production is lesser then expenditure in the country? Change the composition of AG Reduce expenditure (Govt spending)Increase productionKenyes : 2y/2t > [pic 1]Y – [ C + G ]  = I + CAS = I + CACA is the gap between savings and investments; if there is a deficit u can either increase savings or investmentsSolution to current account deficitIncrease savings via interest rate or incomeIncrease investments S – I = CA => ( S,public + S,govt) – (I,p +I,g) =CACA = (Sp –Ip) + (Sg-Ig)CA < 0 public deficitThe current account also equals the country’s net lending to foreigners. Unlike a closed economy, an open economy can save by domestic and foreign investments. National saving therefore equals domestic investment plus the current account balance.  Balance of paymentsthe difference in total value between payments into and out of a country over a period.Composition of Current accountTrade balance (goods)Services balanceWhen consumer pays for services outside of the countryIncome balanceWhen taxes paid goes out of the country to the home countryNet transfersCapital account (not used in this course)Non market transactionsFinancial account (The Capital flows registered in this account)Foreign direct investment deal with international company Company takes the decision to make a business in a new environmentPortfolio/financial flows Capital inflow or flightDerivativesOther investmentsInternational monetary fundsError of omission (not use in this course)CA + FA + BPCA <0 What happen if current account is a deficit? Since Brazil’s CA is dominated in $US.Increase financial accountsIncrease interest rates – attractiveness Liquidate international reserves Will cause bleeding out of reserveLenders to help bleeding, IMFBalance of payments accounts provide a detailed picture of the composition and financing of the current account. All transactions between a country and the rest of the world are recorded in the country’s balance of payments accounts. The accounts are based on the convention that any transaction resulting in a payment to foreigners is entered as a debit while any transaction resulting in a receipt from foreigners is entered as a credit.  Week 2: lesson 4Latin American countries have been the recipients of a large portion of total international capital flows to developing countries, both in the late seventies to early eighties and in the early nineties. These inflows have financed persistent current account imbalances, as well as the accumulation of foreign exchange reservesLearning goalsDebt crisis in the early 90’s International capital flows in XXth CenturyApply concepts of CA of BP in the imbalances of the 70’sInternational contextTime lineIncident RemarksKey events1870-1914The gold standard and stabilityUsage of a currency backed by gold Encourage of open economies-Foreign trade International division of laborWho provides capital to LA to purchase these goods, considering selling coffee is hard to buy railroad stuff.Argentina was rich, richer then Switzerland etcDeveloped economies {Sweden, French, USA, Brittan, Germany}Latin America to export commodities to developed economiesDE export industrialized goods (steel, iron, ore, trains, “railroad things”)Developed nations(Germany) allocate resource to export goods to LAPrivate British capital finance these purchase and provide inflow of financial resources to Sao Paulo. These resources were following to the governments in LA not private sector. So governments were building up debtsLook at the absence of moneyLook at case study1919 – 1939Instability in international monetary systemWestern Nations (developed country)United states financed the world using private capital USA -> Germany ->France/UK -> USALatin AmericaFinance thru Government to government France and UK have to pay back the loans to USAFrance and UK requested Germany to pay back for the warIn order to do so US make loans to Germany thru private capita l(JP morgan)This resulted in US being the international currencyBrazil have strong trade flows to Germany to use marks1944 – 1973Bretton woods: In dollar we trust?Agenda after WWI : We need to avoid another world war. So they need to create peace, prosperity and unity between nation. So multilateral agent (organization) were created to ensure their countries united.Contract was sign in Bretton woods between 46 nations.US Dollar = GoldIMF + World BankUNGATT(general agreement trade agreement)Design something that will avoid savings from being transferred to developed economies.Increase tradeBest way to avoid capital flows, build a system with no capital flowsCurrent account of balance payment =0No “capital flows!”Read book “the globalization of Capital)1960sLondon Bank systems  Bretton woods wanted to increase tradeLondon Bank systemQ regulations in US : Celling to interest rates to central bankCold warNeed to increase liquidity in marketsDeposits in USD with full convertibility to any European currency-Useful for Big companies like GM to pay their workers in EU countriesDeposit flows from US to EuropeEastern European countries/ Socialist country didn’t want to deposit money in London bank system denominated in US$-So they deposit them in international assets in Europe1974 – 1982Oil shock and the first south of south capital flows (apply concept of CA of BPin the imbalance of 70’s) : by Brender and Pisani2 oil shocks 1974 & 1979-Iran war etc-Oil producers are not align with USACorrelations between Oil producers CA Where did this surplus go? Compared to 1973 Sharp rise in price 3x by 1975 and 10x 1980Then 1980-1981: Sharp drop in priceWhen crude oil prices increase oil producing countries get more surplus in their current accountFlow of capitalProducer increase surplusCA Euro money marketsNew York city private banks(citibank)Latin America’s /Asia/ middle east governments1974’s Case illustrationOil producing countries(middle east)US & EULA / AsiaDeveloping countriesRemarks ( outcome )CA > 0CA > 0CA > 0ImpossibleCA appx 0CA apprx 0CA apprx 0PossibleCA > 0CA < 0 (still not enough to keep surplus)CA < 0(so remainder to LA/Asia etc)CA < 0 : DeficitCA > 0 : Surplus//but this means no one is buying the oil//IMPOSSIBLE:  NO OIL NO PRODUCTIONEVERYONE USES OIL. IF WE DON’T THE GDP DECLINES IN THE WHOLE WORLD AND DECLINE IN INFLATION(CAUSING DEFLATION),WE WONT BE ABLE TO PRODUCE AND GDP WILL DECLINE// The trade balance surplus of one nation will be the deficit of another nation // therefore the current a/c surplus will be deficit of another nation