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Growing external imbalance (Topic 4), Apuntes de Administración de Empresas

Universitat Autònoma de Barcelona (UAB)Administración de Empresas

Asignatura: Topics in Spanish Economy, Profesor: , Carrera: Administració i Direcció d'Empreses - Anglès, Universidad: UAB

Tipo: Apuntes

2012/2013

Subido el 21/01/2013

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Topic 4. The growing external imbalance.
Hector Sala, Spanish Economy, 2012-2013, Topic 4
Plan:
1. Structure of the Balance of Payments
2. Evolution of Spain’s Balance of Payments
3. Net lending (-) / Net borrowing (+) of the total economy
4. The external imbalance and the BOPs constraint on economic growth
5. The counterpart imbalance: indebtedness
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Topic 4. The growing external imbalance.

Plan:

1. Structure of the Balance of Payments

2. Evolution of Spain’s Balance of Payments

3. Net lending (-) / Net borrowing (+) of the total economy

4. The external imbalance and the BOPs constraint on economic growth

5. The counterpart imbalance: indebtedness

Balance of Payments Structure

From the IMF Balance of Payments

Manual , 5th edition

A. Current account

Goods

Services

Income

Current transfers

B. Capital account

Capital transfers

C. Financial account

Direct investment (abroad + in reporting economy)

Portfolio investment (assets + liabilities)

Other investment (assets + liabilities)

Reserve assets (gold, and others)

4.1. Structure of the Balance of Payments (I)

4.1. Structure of the Balance of Payments (III)

Services

4.1. Structure of the Balance of Payments (IV)

Income

Current transfers

4.1. Structure of the Balance of Payments (VI)

Financial account

4.1. Structure of the Balance of Payments (VII)

Average 1991-1994: 2.3% Average 1999-2007 : 2.8%

Average 1995-1998: 3.1% Average 2008-2012: 2.7%

4.2. Evolution of Spain’s Balance of Payments (II)

1S

Services balance

Average 1991-1994: -1.0% Average 1999-2007 : -1.8%

Average 1995-1998: -1.2% Average 2008-2012: -2.5%

4.2. Evolution of Spain’s Balance of Payments (III)

1S

Income balance

Average 1991-1994: -2.3% Average 1999-2007 : -5.5%

Average 1995-1998: -0.4% Average 2008-2012: -5.1%

4.2. Evolution of Spain’s Balance of Payments (V)

1S

Current account balance

Average 1991-1994: 0.6% Average 1999-2007 : 0.9%

Average 1995-1998: 1.1% Average 2008-2012: 0.5%

4.2. Evolution of Spain’s Balance of Payments (VI)

1S

Capital account

balance

- The addition of the current account balance (A) and the capital account

balance (B) is critical because

it gives the net lending or borrowing of the total economy.

- If the addition of A and B is positive, it represents the net resources

that the total economy makes available to the rest of the world.

- If the addition of A and B is negative, it represents the net resources

that the total economy receives from the rest of the world.

- The existence of net lending or net borrowing is a disequilibrium that cannot

be sustained permanently because it affects the economy’s possibilities of

economic growth.

In other words, this disequilibrium ends up imposing a constraint to growth

which is usually called the balance of payments constraint on economic

growth.

4.3. Net lending (+) / net borrowing (+) of the total economy (I)

1S

Net lending (+) / net borrowing (-)

Financial balance

Average 1991-1994: -1.8% vs. 2.2% Average 1999-2007: -4.6% vs 4.6%

Average 1995-1998: 0.6% vs. -0.2% Average 2008-2009: -4.7% vs 5.0%

Note: The difference corresponds to “errors and omissions”

4.3. Net lending (+) / net borrowing (+) of the total economy (II)

1. How can net borrowing be financed?

1.1. Through an inflow of external capitals: foreign investment.

1.2. If short of foreign investment, through the use of reserve assets.

2. If reserve assets are exhausted, there are two adjustment mechanisms :

2.1. Expenditures deviation.

2.2. Expenditures collapse.

The later mechanism explains the balance of payments constraint on

economic growth ; that is, the inability to achieve continuous economic

growth maintaining, at the same time, an external imbalance.

4.4. The external imbalance and the BOPs constraint on econ. growth (I)

3. How can a situation of net borrowing be surpassed?

3.1. Through larger firms’ capitalisation, so that firms are less dependant

on foreign financing and can improve their competitive capacity.

3.2. Through technological progress, so that firms’s competitivess is

enhanced.

3.3. Through a rise in human capital, so that firms become more

competitive.

3.4. Through better international marketing strategies.

Bottomline: to surpass a situation of net borrowing the increase of the

economy’s capacity to compet is a must.

4.4. The external imbalance and the BOPs constraint on econ. growth (II)