International Monetary Economics Quiz

International Monetary Economics

• International monetary economics, also known as international macroeconomics or international finance, focuses on monetary and macroeconomic interactions between two or more nations.
• It examines the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and their relationship to international trade.

Balance-of-Payments (BOP)

• A country's international transactions are recorded in the balance-of-payments accounts.
• The BOP has current and financial accounts.

Balance-of-Payment (BOP) - Current Account

• Records exports and imports of goods and services, plus international income receipts or payments.
• Exports are recorded with a positive sign (+).
• Imports are recorded with a negative sign (-).

Balance-of-Payment (BOP) - Financial Account

• Records transactions in financial assets between residents and nonresidents.
• Sales of assets to nonresidents are exports, given a positive sign (+).
• Purchases of assets from nonresidents are imports, given a negative sign (-).

Current Account Example

• If a Filipino buys a Samsung phone (P40,000) from South Korea, the Philippine current account decreases by P40,000, representing an import.
• If a Filipino company pays dividends ($2,000) to an American shareholder (exchange rate 50 pesos = $1), the US current account increases by $2,000, representing an international income receipt for a US resident.

Double-Entry Bookkeeping

• Each transaction in the balance of payments is recorded twice—once with a positive sign and once with a negative sign.
• Any change in the current account is reflected by an equivalent but opposite change in the financial account.
• Example: A Japanese visitor using a credit card at a Filipino hotel. The current account increases by the expenditure (e.g., P5,000). The financial account decreases to reflect the corresponding sale/transfer of assets.

Detailed Decomposition of the Current Account

• Current Account Balance is comprised of:
  • Trade Balance: Merchandise Trade Balance + Services Balance
  • Income Balance: Net Investment Income + Net International Compensation to Employees
  • Net Unilateral Transfers

Detailed Decomposition of the Trade Balance

• Trade Balance (or Balance on Goods and Services) records net exports.
• Merchandise Trade Balance: Measured by net exports of goods
• Services Balance: Measured by net exports of services (transportation, travel, legal assistance, etc.)

Detailed Decomposition of the Income Balance

• Income Balance: net investment income, and net international compensation to employees.

Net Unilateral Transfers

• Records the difference between gifts received from and to the rest of the world (e.g., foreign aid).

Detailed Decomposition of Financial Account

• Financial Account Balance: Increase in foreign-owned assets in the Philippines OR increase in PH-owned assets abroad.
• This includes PH securities held by foreigners, PH currency held by foreigners, PH borrowing from foreign banks, and foreign direct investment in the PH. As well as Foreign securities, PH bank lending to foreigners, and PH direct investment abroad.

International Transactions and Financial Accounts

• International transactions involving financial assets generate two offsetting entries in the financial account, with no entry in the current account.
• Example: A Philippine resident buying shares from a US company. This creates a positive entry (sale of US dollars) and a negative entry (purchase of shares).

International Transactions and Current Accounts

• International transactions such as gifts or donations create entries in the current account.
• Example: Philippines donating PPE to an African nation. This shows a positive entry in merchandise trade and a negative entry in net unilateral transfers.

Current Account Deficit vs. Trade Deficit

• Current Account deficit occurs when imports exceed exports.
• Trade deficit occurs when imports exceed exports in the goods sector alone

Net International Investment Position (NIIP)

• NIIP measures a country's net foreign wealth (foreign assets owned by residents minus assets owned by non-residents).
• A negative NIIP implies external debt.
• NIIP is considered a stock variable, whereas the current account balance (CAB) is a flow variable.
• Changes in the NIIP are primarily determined by the CAB.

Test your knowledge on international monetary economics, including the balance of payments, exchange rates, and financial systems. This quiz covers concepts related to both current and financial accounts within the broader context of international finance.